By Kim Do

In the recent decision of Walsh Construction v. Toronto Transit Commission et al., 2024 ONSC 2782, the Ontario Superior Court of Justice provided key guidance on important issues arising in the context of a complex construction delay claim. This included commentary on the admissibility and value of using expert evidence to assess compensable delay, and the circumstances when subcontractor flow-through claims may become untenable.

Background

The underlying dispute arose from the delay of completion of a construction project in Toronto. The owner, Toronto Transit Commission (the “TTC”) entered into a contract with a general contractor, Walsh Construction Company Canada (“Walsh”), to build the Pioneer Village Station forming part of the Toronto-York Spadina Subway Extension (the “Project”). The Project was significantly delayed, achieving substantial completion 953 days after the original substantial completion date, revenue service 1,047 days after its original completion date, and contract completion 1,372 days after its original completion date. Walsh sued the TTC as a result of the delay, claiming 23 heads of damages totaling $193 million. Among others, it claimed on behalf of its subcontractors for extended performance and acceleration costs.

In a lengthy decision, the Court found that based on the expert evidence put forward by Walsh, Walsh was entitled to 1,047 compensable days of delay. In coming to this decision, the Court provides insightful commentary on the treatment of expert evidence submitted on compensable delay.

The Court also found that among the damages being claimed, Walsh was not entitled to any damages relating to the flow-through claims it had advanced on behalf of its subcontractors for extended performance and acceleration costs. In doing so, the Court provides interesting commentary on the subcontractor flow-through claims advanced by Walsh and the circumstances that prevented Walsh from succeeding on this front.

The Value of Expert Evidence on Compensable Delay

When advancing a construction delay claim, a key element involves first determining how much delay on a project was caused by each party, and whether that delay should be compensated – i.e., the compensable delay. This is important because in complex construction projects like the Project at issue, there may be smaller and other scopes of work happening at the same time. Expert evidence becomes necessary to assist the court in determining which incidents caused the delay, and the value of that delay.

Here, the TTC argued that Walsh had the onus of proving that the delay it was claiming was the sole responsibility of the TTC on the critical path, and without any concurrent delay, i.e. – making it a compensable delay. Walsh put forward a delay impact analysis report prepared by its construction schedule and delay analysis expert, Richard Ott. Mr. Ott concluded that Walsh was entitled to 1,047 days of compensable delay. The TTC on the other hand, claimed that there were only 411 days of compensable delay. It relied on its own expert report by Navigant, which was notably a critique of the methodology used in Mr. Ott’s report, rather than an independent assessment.

The TTC challenged Mr. Ott’s report, claiming that, among others, Mr. Ott was not an independent witness and thus his report should be given no weight. Specifically, the TTC argued that there was a lack of independence based on a history of retainer exclusively or nearly so by the defence lawyer, a long association with one lawyer or party, and a personal involvement or association with a party. To the TTC, Mr. Ott was part of Walsh’s team, was an advocate for Walsh, and had utilized a biased methodology in arriving at his conclusions.

In considering the TTC’s position, the Court applied the relevant tests to determine the admissibility of expert evidence. At paragraphs 94 to 95, the Court considered the consolidated two-part test as set out in White Burgess Langville Inman v. Abbott and Haliburton Co., 2015 SCC 23. First, satisfying the four criteria set out in R v Mohan, being (a) relevance (b) necessity in assisting the trier of fact (c) absence of exclusionary rule and a properly qualified expert. Second, there is a discretionary gatekeeping step requiring a trial judge to balance the potential risks and benefits of admitting the evidence to determine whether the benefits justify the risk.

The Court also reviewed the factors set out in Wise v. Abbott Laboratories, Limited, 2016 ONSC 7275 to consider when determining the possible bias of an expert witness and to determine the presence of impartiality of bias in an expert. In the Court’s view, Mr. Ott had some previous involvement with Walsh, but that did not make him part of the “Walsh Team” or an advocate, as argued by the TTC. Rather, an expert who analyzed work during a construction project and then continued to do so after litigation, was not necessarily impartial. Experts are called by one party on an adversarial proceeding and are paid to prepare their report and testify, but the TTC had failed to ask Mr. Ott questions about this, whether his fee was contingent on success, and had failed to inquire as to whether there were any prior findings of bias or the results associated with prior retainers.

With respect to whether Mr. Ott had a biased methodology in arriving at his opinions, the Court concluded that he did not – Mr. Ott’s communications with Walsh were reasonable for obtaining answers and necessary documentation. Mr. Ott decided what information was needed for his methodology, and the premise for his conclusions was that Walsh was responsible for any and all delays until the analysis provided that it was the TTC who caused the delay. In the Court’s view, Mr. Ott was able to provide the Court with evidence that was fair, objective and non-partisan.

For Mr. Ott’s report to meet the threshold of necessity, the Court noted that the expert evidence must be more than merely helpful, but not judged on too strict a standard. Evidence would be necessary if it provided information which was likely to be outside the experience and knowledge of the court, but an expert did not substitute the court as trier of fact. The court must still make an informed judgement, and not an act of faith.

Here, Mr. Ott reviewed a significant amount of Project documentation between Walsh, its subcontractors, and the TTC. His delay impact analysis identified and evaluated the changes and delays, events and conditions that were different than presented in the contract documents. It also determined whether the changed conditions impacted Walsh’s progress and ability to perform work, and the impacts of those conditions. Further, Mr. Ott divided the project into 48 “Windows” of time that analyzed the updated schedule created based on Walsh’s contemporaneous schedule and an impacted schedule, and analyzed the transition between each “Window” to determine whether Walsh had caused any delay to the Project.

In concluding that Walsh was entitled to 1047 days of delay, the Court commented on the different types of expert evidence that had been presented by Walsh versus TTC. Its comments made clear that the courts do not favour an expert opinion based only on another expert’s findings. Mr. Ott’s report was the only report that conducted a delay impact assessment and provided an assessment on compensable time. The TTC, on the other hand, did not advance such evidence or conduct an independent analysis, and its expert only undertook a critique of Mr. Ott’s methodology. As a result, in determining the amount of compensable delay, Mr. Ott was the only expert provided on compensable delay.

While also finding serious flaws in the work of the TTC’s expert, the Court noted that had the TTC engaged its own delay analysis, it might have been in a position to choose between the two numbers advanced by the TTC and Walsh, or find a different number. However, without a delay analysis from TTC, the Court at paragraph 132 states that it essentially had a “binary choice” between 1,047 days and 411 days as assessed by the parties’ experts. Ultimately, the Court found that Walsh was entitled to 1,047 days of compensable delay based entirely on Mr. Ott’s report.

The Viability of Subcontractor Flow-Through Claims

Among the heads of damages Walsh advanced, two claims were made on behalf of its subcontractors, who either suffered delay costs or incurred acceleration costs. Prior to trial however, Walsh had settled the claims against it with the subcontractors pursuant to certain release and assignment agreements (known in the US as liquidating agreements). It entered into two types of liquidating agreements. The first was assignment liquidating agreements, in which Walsh paid an amount representing all contract payments due and payable to the subcontractor and the subcontractor assigned its claim to Walsh. The second was non-assignment liquidating agreements, in which Walsh paid an amount representing the contract payments due and payable to the subcontractor, and if Walsh recovered anything from TTC, it would have to pay the subcontractor a portion of the amount recovered dependent on whether it was a global recovery or specific to the subcontractor’s damage claim.

By entering into the two types of agreements, Walsh was also released of all liability to the subcontractor for further claims under the subcontract.

At trial, Walsh attempted to “flow-through” certain of its subcontractor delay claims to the TTC despite having entered into the liquidating agreements. Walsh took the position that it was entitled to recover these damages because the subcontractors would have been entitled to recover these damages from Walsh due to the TTC’s delay and breaches. The subtractors’ claim would “flow-through” Walsh as the general contractor and directly affect TTC as the owner. This is despite there being a lack of privity of contract.

Here, the TTC did not enter into any agreement with any subcontractors, but rather hired Walsh as its general contractor. Walsh sub-contracted for the various services and work required to complete the Project. As a result, the subcontractors could not bring a claim for breach of contract against the TTC and had no direct cause of action against TTC, but only against Walsh. Flow-through claims were a procedural device used to get around such lack of privity of contract between the subcontractors and the owner.

However, in surveying the limited Canadian caselaw surrounding flow-through claims, the Court noted at paragraph 340 that one requirement for such claims was that a general contractor must first have some liability for the damages in question before a general contractor could flow-through the subcontractor’s claim. To succeed, Walsh must at least be potentially liable to its subcontractors for the damages being claimed.

As a result of the use of liquidating agreements, Walsh had no potential or actual liability for the subcontractor flow-through claims. The Court noted at paragraph 341 that Walsh was attempting to do something similar to agreements that were often used in the US to insulate general contractors and subcontractors from liability, while still asserting the subcontractor’s claim as a way to bypass the court’s ruling in Severin v United States, 99 Ct. Cl. 435 (1943) that a general contractor could not flow-through a subcontractor’s claim against an owner if the general contractor had no liability to the subcontractor for damages.

However, in surveying the law, the Court found that the liquidating agreements entered into between Walsh and its subcontractors meant that Walsh retained no liability. A flow-through claim was only a procedural device and not its own cause of action. Thus, the Court stated at paragraph 144 that for Walsh to pass on liability to the TTC, there must remain, at a minimum, potential liability between Walsh and its subcontractors. By entering into these agreements, that liability to Walsh no longer existed. Under Canadian law, a contractor was only entitled to recover damages from an owner that they have actually incurred or expect to incur because of the owner’s breach of contract. Walsh had been fully released of all liability to the subcontractors pursuant to the liquidating agreements. As a result, there was no basis on which to find TTC liable to Walsh for any of the subcontractor flow-through claims.

In coming to its decision, the Court discussed certain policy considerations, including questioning the fairness of contractors using liquidating agreements to circumvent the lack of privity between an owner and a subcontractor. As stated at paragraph 350, while the jurisprudence in the United States seemed to accept liquidating agreements as being a valid way to maintain liability and to flow through both the subcontractor claim and the contractor’s liability to the subcontractor to the owner, in the Court’s view, placing liability upon the owner where the owner had not contracted with the subcontract, and where the general contractor had removed itself from the picture, was not right, and this made the flow-through claims untenable.

For example, as set out at paragraph 349, the use of liquidating agreements had removed any motivation for Walsh to first vet, scrutinize, or minimize the validity of its subcontractor’s claim, despite Walsh being in the best position to do so as the general contractor. Here, Walsh had not taken advantage of potential contractual defences available in its subcontracts.

Ultimately, Walsh could not recover from the owner the damages suffered by its subcontractors after having been released of any possible liability for the same losses. The Court emphasized that subcontractor flow-through claims were solely a procedural device and did not create a new cause of action between a subcontractor and the owner without privity of contract. Effectively, the liquidating agreements resulted in Walsh having no liability for the damages being claimed, and Walsh being unable to recover the damages suffered by its subcontractors from the TTC.

Walsh has appealed this decision to the Ontario Court of Appeal.

Takeaways

This case raises important points in the context of a construction delay claim, and in particular relating to the expert evidence that is used in construction delay claims and how the use of liquidating agreements to resolve issues between contractors and its subtrades may later impact the viability of a subcontractor flow through claim.

The Court’s comments regarding the use and critique of expert evidence highlight the importance of a party having its own construction delay analysis and compensable delay opinion. In the context of a complex construction project with many moving pieces, a Court will heavily rely on expert opinions, and while they may be costly, retaining a construction delay expert to conduct its own assessment will likely be more useful than not in a delay litigation claim. Having only a critique of another expert’s report may not be seen favourably by the courts, resulting in a situation like in this case where the Court was put in a difficult position where it had to choose either between the 1047 days of compensable delay as calculated by Mr. Ott, or 411 days as argued by TTC, and nothing in between.

The Courts’ comments on the practice of continually retaining the same expert are also useful. Here, the repeated use did not indicate bias. Rather, in construction, specialized claims often require the same expert’s opinion, making it common practice for parties to repeatedly hire them.

Further, the Court’s comments on the viability of Walsh’s subcontract flow-through claims clearly emphasize the importance of privity of contract. Flow-through claims are a procedural device, and not a cause of action. To create the latter, there must be a privity of contract. Otherwise, the flow-through claim only exists if there is potential liability between the general contractor and the subcontractor. Contracting out of this element may lead to the unfortunate reality that the viability of the flow-through claim has now ended.

Overall, this case serves as a cautionary tale to general contractors and subcontractors and a consideration point when entering into liquidating-type agreements in respect of its subcontractor claims for damages for which recovery against the owner may be sought. While not immediately apparent, there are implications of liquidating agreements that formally release the general contractor from any liability for their subcontractors’ flow-through claims. As stated by the Court, there are various reasons for this, including a consideration that general contractors are in the best position to scrutinize subcontractors’ claims before they release themselves of liability and attempt to flow the claim through to the owner.

 

Contributions to this article were also made by Simon Wu, Articling Student.