Construction contract requiring builders’ insurance supersedes lease agreement: Ontario court

An Ontario court has ruled against a major construction firm and three co-defendants who attempted to use a subrogation bar defence in a lawsuit filed by the Bank of Nova Scotia over damage resulting from a leak during a construction project at the bank’s Toronto office tower.

Last week, Mr. Justice Ed Morgan of the Ontario Superior Court of Justice released a decision ruling that construction firm PCL Constructors Canada Inc. and mechanical systems contractor Lockerbie and Hole Industrial Inc. cannot rely on an insurance provision in the original lease agreement Scotiabank made in 1985 as a subrogation bar.

Scotiabank is suing PCL, Lockerbie and Hole, mechanical contractor Modern Niagara Toronto Inc. and M.A. Stewart and Sons Ltd., a distributor of plumbing valves and fittings, over damages that occurred in 2004 during a renovation project at the 68-storey Scotia Plaza office and retail building. According to court records, the work took place between 2004 and 2007. Lockerbie and Hole has since been acquired by construction contractor Aecon Group Inc.

The work at Scotia Plaza included upgrading and replacement of mechanical systems as well as work on the water system. The contract included general conditions, supplementary conditions and 113 pages of engineering specifications. It initially required that PCL Constructors take out an insurance policy covering the $20 million-plus value of the project and $1 million in liability coverage. The required coverage was changed in the supplementary conditions of the contract, which required PCL to get $20 million in builder’s risk insurance.

However, court records indicate the defendants later discovered insurance provisions in a lease agreement signed in December, 1985 between Scotia Realty and Campeau Corp., the original developer of the site on the north side of King Street east of Bay Street.

That lease required Campeau to purchase “during construction or any re-construction of the building and substantial replacement or substantial repair of an part thereof, builders’ all risk insurance with respect to the Building and any on-site or off-site work, materials and equipment related thereto protecting the Lessor, the Lessee, and all contractors and subcontractor …”

In background included in the March 14, 2013 ruling, Judge Morgan noted that PCL and the firms being sued by Scotiabank amended their pleadings to claim they were third-party beneficiaries of the 1985 lease agreement with Campeau. The current owner of Scotia Plaza is Scotia Realty Ltd., a subsidiary of the bank.

However, Judge Morgan noted the 2004 construction contract “supersedes all prior negotiations, representation or agreements,” including the bidding documents.

“The 2004 Contract not only required PCL to obtain builder’s risk insurance coverage, but PCL in fact obtained that coverage,” he wrote. “In these circumstances, a prior inconsistent obligation in a contract to which PCL is a stranger, and which was not in the contemplation of the parties, does not, and cannot, provide evidence of the relevant intentions. It is a fortuitous find that was unearthed well after the relevant agreement was reached and acted upon.”

Judge Morgan added there are no grounds to dismiss Scotiabank’s claim and there are “many issues” that “must be resolved at trial.”