Background

In 2011, the Toronto Transit Commission (“TTC”) contracted Walsh Construction Company of Canada (“Walsh”) to construct the Steeles West Subway Station, later renamed Pioneer Village Station, as part of the Toronto-York Spadina Subway Extension. The original contract, valued at approximately $166 million, stipulated a substantial performance date of November 5, 2014. However, the project faced significant delays, with substantial performance achieved on June 15, 2017—953 days late—and final completion on November 7, 2018.

Walsh attributed the delays to TTC’s actions and sought $193 million in damages across 23 categories. TTC acknowledged responsibility for 411 days of delay but disputed liability for the remaining 636 days. Additionally, TTC counterclaimed for $22 million in liquidated damages, arguing that delays are common in projects of this magnitude and that responsibility should be shared.

Legal Principles Governing Delay Claims

The court outlined key legal principles regarding delay claims in paragraphs 89 to 92 of the judgment. These principles provide a framework for how courts assess different types of delays and their compensability.

Types of Delays:

1. Excusable vs. Non-Excusable Delays:
   • Excusable Delays: Delays beyond the contractor’s control, such as force majeure events, labor strikes, or owner-caused delays. These may entitle the contractor to a time extension and, in some cases, compensation.
   • Non-Excusable Delays: Delays caused by the contractor, such as poor site management or insufficient staffing. These do not warrant time extensions or compensation and may result in liquidated damages.
2. Compensable vs. Non-Compensable Delays:
   • Compensable Delays: Delays for which the owner is responsible, such as failure to provide design approvals on time. These can lead to both time extensions and monetary compensation.
   • Non-Compensable Delays: Delays resulting from unforeseen circumstances not caused by either party, often entitling the contractor only to a time extension but no monetary relief.
3. Concurrent Delays:
   • When both the owner and contractor contribute to a delay simultaneously, courts assess the critical path impact of each party’s delay to determine liability.
4. Critical Path Delays:
   • Delays affecting the project’s critical path, the sequence of tasks determining the overall project duration, are the most scrutinized in delay claims. If a delay impacts the critical path, it is more likely to justify a time extension or compensation.

Justice Hood emphasized that a clear causal link must be established between a delay event and its impact on the critical path for claims to succeed. Contractors must provide thorough delay analyses to substantiate their entitlement to relief.

Expert Evidence in Construction Delay Claims

A central aspect of the case was the evaluation of expert testimony regarding construction delays. Walsh relied on the expert testimony of Richard Ott, a delay analyst who conducted a comprehensive examination of over 780 TTC-related change conditions using the Primavera software. Ott concluded that Walsh was entitled to 1,047 compensable days of delay.

In contrast, TTC did not commission an independent delay analysis. Instead, it presented an expert whose role was primarily to critique Ott’s methodology without offering an alternative assessment. This left the court with a binary choice: either accept Ott’s findings or dismiss them without a competing analysis. Justice Hood emphasized that TTC’s approach was risky, stating: “Without an independent expert analysis, the court was left with a stark decision—to accept the only available expert evidence or to disregard expert testimony altogether.”

The court found Ott’s testimony to be thorough and credible, while TTC’s expert was perceived as overly rigid and unconvincing during cross-examination. Justice Hood noted that Ott “was not dogmatic or stubborn in his opinions,” which enhanced his credibility. Consequently, the court accepted Ott’s analysis, leading to a favorable outcome for Walsh.

TTC’s failure to present its own detailed delay analysis ultimately undermined its position. Justice Hood remarked, “The burden of proof in construction delay claims does not rest solely on the plaintiff; the defendant must also provide a meaningful counter-analysis if it wishes to challenge the findings.” This highlights a critical lesson for construction litigants—merely critiquing an opposing expert’s methodology is insufficient without a substantive counter-analysis.

Key Takeaways on Expert Evidence:

• Conduct Your Own Analysis: Defendants in construction delay cases should engage their own experts to perform comprehensive analyses rather than merely critiquing opposing expert reports.
• Avoid a Binary Outcome: By failing to present an alternative expert opinion, a defendant risks forcing the court into an all-or-nothing decision.
• Burden of Proof Is Shared: Courts expect both parties to provide substantial evidence when disputing construction delays. Without a counter-expert report, the court may be left with little choice but to accept the claimant’s expert testimony.

Flow-Through Claims and Liquidating Agreements

Walsh also attempted to pass subcontractor claims through to TTC via flow-through claims. Flow-through claims, also known as pass-through claims, enable general contractors to seek damages from owners on behalf of subcontractors when the owner’s actions have caused delays or cost overruns. The enforceability of these claims hinges on the general contractor retaining some liability to its subcontractors for the damages in question.

Walsh entered into two types of liquidating agreements with its subcontractors:

1. Assignment Agreements: Walsh fully compensated subcontractors for their claims, and in return, the subcontractors assigned their claims to Walsh.
2. Non-Assignment Agreements: Walsh compensated subcontractors with the understanding that if it recovered any funds from TTC, a portion would be shared with the subcontractors.

In both scenarios, Walsh received full releases from the subcontractors, absolving it of any further liability. The court determined that since Walsh had fully settled these claims and was no longer liable to the subcontractors, it could not recover those amounts from TTC. Justice Hood stated: “A general contractor cannot seek to recover amounts it has no obligation to pay,” emphasizing that flow-through claims require actual liability.

Judicial Concerns on Flow-Through Claims

The court raised concerns about the fairness of allowing a contractor to pass along subcontractor claims while being completely insulated from liability. Justice Hood stated: “The fundamental issue here is whether a contractor who has paid and extinguished the subcontractor claims can nonetheless pursue them against the owner. In my view, the answer is no.”

Additionally, the court questioned the incentives created by liquidating agreements, noting that they could lead to claims being passed through without proper vetting. Justice Hood remarked: “There is an inherent risk in these agreements that the contractor merely acts as a conduit, forwarding subcontractor claims without meaningful assessment.”

Comparison Between U.S. and Canadian Law on Liquidating Agreements

The court acknowledged that in the United States, liquidating agreements are commonly accepted as a valid mechanism to maintain liability and flow through both the subcontractor’s claim and the contractor’s liability to the owner. Justice Hood observed: “Caselaw in the United States seems 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.” However, the court expressed reservations about this approach, stating: “While perhaps useful in minimizing litigation, in my view the attempt to place liability upon the owner for the subcontractor’s damages, where the owner has not contracted with the subcontractor and where the contractor has effectively removed itself from the picture, is not right.”

This highlights a key difference between U.S. and Canadian law regarding liquidating agreements. In the U.S., such agreements are more readily accepted as a means to facilitate flow-through claims. In contrast, Canadian courts may scrutinize these agreements more closely, particularly if the contractor has been fully released from liability.

This decision is currently under appeal at the Ontario Court of Appeal. The outcome of the appeal could significantly impact how flow-through claims are handled in Ontario moving forward.

Key Takeaway on Flow-Through Claims:

• Retain Liability for Flow-Through Claims: General contractors should ensure they maintain some liability to subcontractors before advancing flow-through claims, as courts may reject claims where liability has been fully extinguished. The pending appeal may further clarify this issue.

Conclusion

The Walsh Construction v. TTC decision provides critical guidance on two key issues in construction litigation: the role of expert evidence in substantiating delay claims and the enforceability of subcontractor flow-through claims. The ruling highlights the importance of presenting a well-supported independent expert analysis when defending or advancing delay claims, as courts may reject a party’s arguments if they fail to provide a meaningful counter-analysis.

Additionally, the decision demonstrates that Canadian courts are likely to scrutinize liquidating agreements in subcontractor claims, particularly if the general contractor has fully settled with its subcontractors and no longer retains liability. The case reinforces the need for contractors to carefully structure their agreements and ensure they have a defensible basis for passing claims through to an owner.

Given that the decision is currently under appeal, the legal landscape regarding subcontractor flow-through claims in Ontario remains in flux. Contractors, owners, and subcontractors should closely monitor the outcome, as it may influence how construction claims are advanced and adjudicated in future disputes.

The post Behind Schedule, In Court: The Legal Framework for Construction Delays: Insights from Walsh Construction v. Toronto Transit Commission appeared first on FREEDIN & ROWELL LLP.

Background

In 2011, St. Michael’s Hospital entered into a public-private redevelopment project with Infrastructure Ontario to build a 17-story patient care tower. The project’s construction contract was awarded to a subsidiary of Bondfield Construction Company (hereinafter referred to as “Bondfield”), for a sum of $301,189,863. Bondfield was also responsible for obtaining and maintaining surety bonds, including a performance bond and a labour and material payment bond, as required by both the construction contract and the project lending agreement. Accordingly, Bondfield obtained such bonds from Zurich Insurance Company (“Zurich Insurance”). The project was financed by $230 million loan advanced by a syndicate of lenders including the Bank of Montreal which was named as the administrative agent for the lenders.

As the project unfolded, Bondfield fell into default, therefore inducing the Bank of Montreal to demand payment from Zurich Insurance by invoking the surety bonds. Nevertheless, Zurich Insurance sought to rescind the bonds it had issued due to the discovery of fraudulent misrepresentations and collusion between Bondfield and St. Michael’s Hospital that appeared to have enabled Bondfield to secure the construction contract. Zurich Insurance took the position that it would have never agreed to issue the bonds had it known about the fraud. The Bank of Montreal and certain subcontractors brought two applications seeking a declaration that Zurich may not rescind the bonds because doing so would affect their rights as innocent third parties (ie. they would not get paid as a result of default).

The Court of Appeal Decision

The Court of Appeal asserted that “prejudice to the rights of third parties may be, but is not always, a bar to rescission”. The ONCA dismissed both applications, ruling that the surety bonds may be rescinded despite prejudice to the lenders and subcontractors, and remitted the case to the trial judge to determine whether recession is appropriate in the case at bar based on the factual record.

Implications

This recent court ruling has significant implications for those in the construction industry who use bonds as a safeguard against default. It remains to be seen in this case whether Zurich Insurance will in fact be entitled to rescind its construction bonds. However, it should be noted that burden of proof required to acquire such relief remains high and will only be granted in certain compelling circumstances. Albeit, construction lenders and subcontractors alike, may wish to consider alternative risk mitigation measures in light of this decision.

Co-author: Harjaap Sahota

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