Relief from Forfeiture - Wessuc Inc. v. Todd Brothers Contracting et al., 2024 ONSC 4368

Overview

In Wessuc Inc. v. Todd Brothers Contracting et al., the Ontario Superior Court confirmed the factors that a court must consider when deciding whether to grant relief from forfeiture.^[1] Although the case was ultimately decided based on the principles of contract interpretation and the evidence of the parties, the decision gives much to consider for bonding and surety companies by way of defending against claimants seeking relief from forfeiture.

Background

The plaintiff, Wessuc Inc. (“Wessuc”), was a subcontractor of the defendant, Todd Brothers Contracting Ltd. (“Todd Brothers”). Wessuc is a waste management company, specializing in industrial and agricultural wastewater infrastructure and processes.^[2] Todd Brothers is a contractor, specializing in general heavy civil construction.^[3] Three members of the Todd family are also named as defendants in this case. The final defendant is The Guarantee Company of North America (“GCNA”; now Intact Financial Corporation). GCNA was Todd Brothers’s surety for the project by way of labour and material payment bond. The claim against GCNA will be the focus of this case commentary.

Wessuc was retained by Todd Brothers to remove sludge from a water treatment lagoon at the Sunderland Water Pollution Control Plant in the Township of Brock. Todd Brothers was the successful bidder on a tender by the Regional Municipality of Durham (“Durham”) for the Sunderland Sewage Lagoon Expansion project.^[4] The tender required the removal of the sludge and its disposal to an approved off-site location (the “Project”). Durham estimated the total volume of waste to be less than 6,100 m³.

Todd Brothers entered into its subcontract with Wessuc relying on the representation by Wessuc that it is an expert in removing, handling, and disposing of sewage. Wessuc was awarded the Project based on its bid, which included a unit price for material extracted and material hauled to the approved landfill site. Under the contract, Todd Brothers and Durham estimated the subcontract price to be near $1.0M. Wessuc quoted this price based on the methodology prescribed in the tender: the wastewater needed to be dewatered to a specified slump and then hauled to an approved landfill in trucks.

Sometime prior to commencing the work, Wessuc sought a modification to the methodology: Wessuc wanted to extract the wastewater without dewatering and spray the wastewater over farmlands with consent of the farm owners. Wessuc assured Todd Brothers that it had agreements with enough farmers to accept all or almost all of the wastewater. The new methodology allowed the work to be completed faster because there would be no need to dewater the wastewater. Upon these assurances, both Todd Brothers and Durham agreed to allow the change in methodology. Wessuc agreed that any waste material that they could not spray would be trucked off to an approved landfill site. Wessuc also delivered a quote for the new methodology which stated one price of approximately $1.0M.

On September 6, 2018, Wessuc delivered an invoice for $458,000. At this time, Wessuc had not completed its scope of work and Wessuc had exhausted all available farmland on which they could spray wastewater. Wessuc was now required to incur the cost of dewatering and transporting sludge to a landfill. From September 6 to 26, Wessuc performed little to no work. Wessuc did not bring their own dewatering equipment on site and caused damage to Todd Brothers’s machine. Wessuc did not attend on site for the first haulage of sludge to the landfill. During this period, Todd Brothers delivered notices to Wessuc stating that Todd Brothers will complete the work in place of Wessuc if Wessuc does not finish the work. On September 26, due to Wessuc not performing the work and demobilizing, Todd Brothers assumed Wessuc abandoned the Project and terminated the subcontract.  Wessuc commenced this action to recover $1.7M for breach of contract, breach of trust, and unjust enrichment, plus costs and interest.

Decision

The court considered five issues:

1. Was there a contract between the parties? What were the terms?
2. Did Wessuc abandon the Contract or did Todd Brothers terminate the contract?
3. What are the Damages from abandonment or termination?
4. Does quantum meruit apply?
5. Did Wessuc comply with the terms of the Labour and Material bond?

The court found in favour of Todd Brothers on all five issues.

1. Was there a contract between the parties? What were the terms?

   
   Wessuc argued that there was only one contract between the parties: they would perform the work on a unit price basis. Todd Brothers argued that, after the methodology had been changed by Wessuc from dewatering and trucking to spraying wastewater into farms, the parties had entered a new stipulated price (lump sum) contract.

   The court agreed with Todd Brothers because the change in methodology decreased the time required to complete the work and changed the product being disposed of from sludge to wastewater. Because wastewater is more watered down in its sewage content as compared to sludge, which has its water content removed, a greater volume of wastewater would need to be removed to achieve the same level of sewage content removal. Under this condition, if the parties agreed to keep the contract at a unit price, it would be more expensive for Durham to have the lagoon cleaned. The court found that the evidence did not support such an interpretation because it would be illogical for Durham to have agreed to this. The court found that the change in methodology resulted in a new contract which was stipulated price.

2. Did Wessuc abandon the Contract or did Todd Brothers terminate the Contract?

   
   Due to Wessuc’s inaction on the jobsite from September 6 to 26 and frequent notices from Todd Brothers to perform the work, the court found that Wessuc had abandoned the Project. Todd Brothers was permitted to terminate the contract and perform the work itself.

3. What are the damages from abandonment or termination?

   
   The court relied on the decision in Fairview Home Improvements Inc. v. Antonopoulos,^[5] in which Associate Justice Wiebe found that “… in the absence of an express provision to the contrary, a contractor on a fixed price contract is not entitled to payment until “substantial completion” of the work.” The court then compared the state of the work performed by Wessuc to the level of performance required for “substantial performance” under the Construction Act.^[6] In the court’s opinion, the level of completion required to achieve substantial performance for Wessuc was to have $25,000 worth of work left to be performed (based on a contract price of nearly $1.0M). The court found that the value of the work remaining was far greater than $25,000.

   Although not stated in the decision, it can be inferred that because the threshold performance level for substantial performance was not achieved, the level of performance required for substantial completion (which is much higher) could not have been completed. Therefore, Wessuc was not entitled to receive payment for the full contract price.

   On the counterclaim, Todd Brothers claimed for the cost they had incurred for trucking after Wessuc had abandoned the contract and for the damage to its equipment. The court awarded Todd Brothers $53,000.

4. Does quantum meruit apply?

   
   The court found that Todd Brothers was not unjustly enriched. Todd Brothers paid Wessuc for the work it had performed up to September 6, 2018, after which they stopped working.

5. Did Wessuc comply with the terms of the L&M bond?
   
   While this issue was obiter, the court’s determination that Wessuc did not notify GCNA within the required notice period provides some valuable insight into the consequences of non-compliance with the terms of a bond.
   
   The court’s opinion on this issue was obiter because it already concluded that there was no claim, and thus there was no claim on the bond. However, the court found that even if Wessuc had a claim to bring against the insurer, Wessuc had not notified GCNA within the required notice period.
   
   Per the bond, Wessuc needed to deliver a notice of claim to GCNA at most 120 days after the subcontractor was to be paid in full or on the last day of work performed. Wessuc argued that, factually, it had provided notice within the required time. In the alternative, Wessuc argued that the court should grant it relief from forfeiture because the breach of the contractual provision was minor and GCNA suffered no prejudice. GCNA argued that not providing a notice of claim on time barred Wessuc from making any claim. Further, they argued that if relief from forfeiture is available, the court should not grant relief because of the prejudice they face from the breach.
   
   The court found that irrespective of when Wessuc claimed the payment was due, Wessuc failed to deliver a notice of claim within 120 days. Further, the information that GCNA would have required to make an investigation on the claim was delivered to GCNA almost two years after the notice was delivered. The amount claimed under the bond had also changed from the time of notice to the time of commencing this action. The court found that this made the notice substantially inaccurate. Despite the delayed notice and inaccurate and delayed claim documentation, the court found no prejudice against GCNA from Wessuc’s breach. However, due to Wessuc’s unreasonable conduct, the court would not have granted relief from forfeiture.

Analysis

The Ontario Court of Appeal in Monk v. Farmers’ Mutual Insurance Company cited the Supreme Court of Canada decision in Falk Bros. Industries Ltd. v. Elance Steel Fabricating Co. to establish that the purpose of relief from forfeiture in insurance matters is:

to prevent hardship to policy beneficiaries where there has been a failure to comply with a condition for receipt of insurance proceeds and where leniency in respect of strict compliance with the condition will not result in prejudice to the insurer.^[7]

Further, Monk confirmed three factors that a court must consider when exercising its discretion in granting relief from forfeiture: (1) reasonableness of the insured’s conduct, (2) gravity of the insured’s breach, and (3) the disparity between the value of the property forfeited and the damage caused by the breach.^[8] These three factors are known as the “Saskatchewan River” or “Liscumb” test. Interestingly, this test does not include prejudice against the insurer as a factor when relief from forfeiture is available.^[9] In paragraph 79 of Monk, the court states that although relief from forfeiture is not available where a breach of the insurance policy consists of non-compliance with a condition precedent to coverage, a court should find a breach constitutes non-compliance in rare cases when the breach is substantial and prejudices the insurer. Thus, under Monk, prejudice is to be considered in deciding whether relief from forfeiture is available. If it is, then the Liscumb Test is to be applied.

Wessuc relied on the British Columbia Court of Appeal (BCCA) decision in British Columbia Ltd. v. Alta Surety Co.^[10]The court in Alta Surety also cited Elance Steel in its decision and stated that among several other factors, “by far the most important factor” to consider when granting relief from forfeiture is whether the surety has suffered prejudice by the insured’s breach.^[11]

In the present decision, the court followed Monk rather than Alta Surety by using the Liscumb Test. The court found that there was no significant prejudice against the insurer. Accordingly, the court stated that relief from forfeiture was available to the insured, subject to the Liscumb Test. In applying the Liscumb Test, the court stated that it would not have granted relief from forfeiture under the given facts because of Wessuc’s grossly unreasonable conduct. Therefore, the court weighed the unreasonableness factor higher than the absence of prejudice against the insurer.

This result would potentially have been different under Alta Surety because in that case, prejudice was stated to be the most important factor. If the court found no prejudice against the insurer, it would have most likely have granted relief from forfeiture to the insured.

Monk is an Ontario Court of Appeal decision making it a binding authority on the Ontario Superior Court, whereas Alta Surety, being a decision from the BCCA, is only a persuasive authority. However, Elance Steel is a Supreme Court of Canada decision and it is binding on all courts. The obiter discussion in the present decision does not directly conflict with Elance Steel because the court did not completely ignore prejudice against the insurer; the court used prejudice as a preliminary checkpoint in considering whether relief from forfeiture is available.

Monk adds an additional burden on beneficiaries when attempting to claim relief. This decision could have the effect of closing the doors on future insurance beneficiaries making claims for relief from forfeiture. Even if beneficiaries can demonstrate that the insurer is not prejudiced by a breach of provision, an insurer could successfully rely on Monk to dismiss a bond claim on the basis of technical non-compliance with the terms of the bond. Elance Steel, Alta Surety, and Monk all mention that prejudice against the insurer is at the core of the purpose of relief from forfeiture. If prejudice is the most crucial factor to consider, the factors outweighing a finding of no prejudice must be very strong. In the present case, the court found that Wessuc came to the court with “unclean hands”. This is an indication that to find success in using the Monk and the Liscumb Test to outweigh a finding of no prejudice against the insurer will be highly fact specific. Conduct of the insured must be as highly disagreeable as Wessuc’s to make an insurer successful in dismissing a bond claim when relief from forfeiture is available. New case law from different provinces will offer greater insight into whether other provinces adopt the approach of deciding to grant relief from forfeiture based only on prejudice against the insurer or to use the Monk framework.  

Takeaways

Prejudice against insurers remains the primary consideration for courts when granting relief from forfeiture to a beneficiary. However, this case has demonstrated a factual matrix where the court decided to deny relief from forfeiture, despite there being no prejudice to the insurer, in reliance on the three Liscumb Test, as confirmed in Monk:

1. reasonableness of the insured’s conduct;
2. gravity of the insured’s breach; and
3. the disparity between the value of the property forfeited and the damage caused by the breach.