



COURT OF APPEAL FOR ONTARIO

CITATION: Delco Automation Inc. v. Carlo's Electric Limited,
    2016 ONCA 591

DATE: 20160727

DOCKET: C59834

Feldman, Gillese and Brown JJ.A.

BETWEEN

Delco Automation Inc.

Plaintiff
    (Respondent/

Appellant by way of cross-appeal)

and

Carlos Electric Limited and Carlo Fornasier

Defendants
    (Appellants/

Respondents by way of cross-appeal)

AND BETWEEN

DOCKET: C59835

Delco Automation Inc.

Plaintiff (Respondent)

and

Carlos Electric Limited

Defendant (Appellant)

Stephen Schwartz, for the appellants/respondents by way
    of cross-appeal

James L. MacGillivray, for the respondent/appellant by
    way of cross-appeal

Heard: March 22-23, 2016

On appeal from the judgment of Justice G. Patrick Smith
    of the Superior Court of Justice dated December 10, 2014 with reasons reported
    at 2014 ONSC 7157.

Brown J.A.:

I.

OVERVIEW

[1]

These appeals concern a dispute over the scope of work the parties agreed
    to in their contracts for construction projects at two correctional
    institutions and issues relating to the performance of those contracts.

[2]

The appellant, Carlos Electric Limited (CEL), is an electrical
    contracting company whose principal is the individual appellant, Carlo Fornasier.
    The respondent, Delco Automation Inc. (Delco), is an engineering firm
    specializing in systems integration.

[3]

Correctional facilities require integrated security systems (ISS) that
    allow security officers to control an entire security system from one or more
    touch screens located throughout the facility. In an ISS, a central computer is
    linked to controllers that send electronic messages to control field devices,
    such as cameras, speakers, and door locks. Field devices are connected to
    controllers by wires contained in protective conduits running throughout the
    system. One of the final steps in installing an ISS is the termination of the
    wire, which is the connection of the wire at the head end, or controller, to
    each field device, allowing electronic messages to pass back and forth from the
    device to the central command centre.

[4]

The disputes between the parties concern ISS work at two correctional
    facilities.  On the first project, the Greater Toronto Area Youth Centre in
    Brampton (the Brampton Project), Delco contracted with the general contractor
    to provide systems integration work. Delco hired CEL as an electrical sub-contractor.
    Delco claimed CEL was required to supply and install wiring inside and outside
    the perimeter of the buildings. CEL disagreed. Delco had to retain other firms
    to complete the work. Delco claimed damages for CELs failure to perform the
    work; CEL counterclaimed for monies due under the contract.

[5]

The second project was at the Collins Bay Correctional Institution (the
    Collins Bay Project). CEL secured the contract for certain electrical work.
    CEL, in turn, sub-contracted with Delco to provide the system integration work.
    Delco took the position that the contract required CEL to perform the work of
    terminating the field devices. CEL disagreed. Delco performed the termination
    work under protest and sued CEL for the cost of the work.

[6]

As the trial judge noted, the issues in both actions were similar as
    they involved a determination of the scope of work agreed to by the parties
    under their contracts for each project.

[7]

On the Brampton Project, the trial judge found CEL had contracted to
    supply and install the inside and outside perimeter wire, CEL had breached the
    contract, and the trial judge awarded Delco damages of $443,103.10. The trial
    judge dismissed CELs counterclaim.

[8]

On the Collins Bay Project, the trial judge found CEL breached the
    contract by refusing to perform the termination work. The trial judge awarded
    damages of $487,941.63 against CEL, as well as against Mr. Fornasier on the
    basis that he had assented to, or acquiesced in, CELs breach of the trust
    provisions contained in ss. 8 and 13 of the
Construction Lien Act
,
    R.S.O. 1990, c. C.30 (the 
CLA
). However, the trial judge refused
    Delcos request to declare that the judgment against Mr. Fornasier survived
    bankruptcy pursuant to s. 178(d) of the
Bankruptcy and Insolvency Act
,
    R.S.C. 1985, c. B-3
.

[9]

In relation to the Brampton Project, CEL appeals the trial judges award
    of damages, the quantum of damages, and the dismissal of its counterclaim. In
    relation to the Collins Bay Project, CEL appeals the award of damages, Mr.
    Fornasier appeals the trial judges order in relation to his liability under
    the
CLA
, and Delco cross-appeals the trial judges finding that Mr.
    Fornasiers liability did not survive his bankruptcy.

[10]

I would dismiss both appeals by CEL, allow the appeal of Mr. Fornasier
    in respect of his personal liability under s. 13 of the
CLA
, and
    dismiss Delcos cross-appeal in the Collins Bay Project action.

II.

STANDARD OF REVIEW

[11]

Most of the grounds of appeal advanced by CEL involve either issues of
    contractual interpretation or specific findings of fact made by the trial
    judge, especially regarding what terms the contracts contained. The former are
    reviewable on the deferential standard set out in
Sattva Capital Corp. v.
    Creston Molly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-52;
Heritage
    Capital Corp. v. Equitable Trust Co.
, 2016 SCC 19, [2016] S.C.J. No. 19,
    at para. 21. The latter can only be set aside on appellate review by
    demonstrating the trial judge made a palpable and overriding error:
Housen
    v. Nikolaisen
, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 10.

III.

THE BRAMPTON PROJECT (C59835)

The issues

[12]

CEL submits the trial judge erred in: (a) concluding the scope of work
    agreed upon by the parties included the supply and installation of wiring inside
    and outside the perimeter of the buildings; (b) finding Delco had reasonably
    mitigated its damages; (c) allowing Delco to recover certain damage claims; and
    (d) dismissing CELs counterclaim.

(a)      The scope of work

[13]

CEL submits the trial judge made three errors in concluding CEL had
    breached the contract by failing to install and supply the wiring:

(i)

He found the parties had agreed on the scope
    of work under the contract, when the evidence showed they had not;

(ii)

He ignored the evidence of CELs expert, Andre
    Miksys; and

(iii)

He improperly drew an adverse inference
    against CEL on the basis that it had lost and destroyed material documents.

The evidence and the trial judges findings of fact

[14]

The scope of work dispute turned on whether the parties had agreed CEL
    would supply and install the wiring for the project and perform work outside
    the perimeter of the buildings. At trial, certain facts about the negotiations
    between the parties on the scope of work were not in dispute:

(i)

Delco sent a Scope of Work (SOW) document
    to CEL shortly before the December 8, 2006 bid date that showed the electrical
    contractor would supply and install wiring inside and outside the perimeter of
    the buildings;

(ii)

CEL provided Delco with an oral quote on
    December 8, 2006 for $624,950;

(iii)

When Delco learned, in March 2007, that it
    had been awarded the contract, it contacted CEL to confirm its bid was still
    good; in response, CEL provided, on March 22, 2007, a written quote that included
    the supply and installation of wiring;

(iv)

On July 26, 2007 Delco emailed CEL that the general
    contractor had accepted Delcos proposal to use CEL and told CEL to treat the
    email as a Letter of Intent to proceed based on your Quotation dated March 22,
    2007; and

(v)

CEL started to work on the Brampton Project
    before Delco issued a purchase order for the work on November 28, 2007. The
    Purchase Order stated it was based on the scope of work identified in Delcos
    December 2006 SOW, which included the installation of the wiring. CEL
    immediately objected to the scope of work included in the purchase order.

[15]

However, the trial judge was faced with other, conflicting evidence about
    whether CEL had agreed to supply and install wiring:

(i)

In its statement of defence, CEL pleaded it did
    not possess Delcos SOW when it made its bid in December 2006, a position Mr. Fornasier
    recorded on his mark-up of the November 2007 purchase order. However, at trial Mr.
    Fornasier admitted CEL had received the SOW, but had not paid it much attention
    before making its quote to Delco;

(ii)

CEL relied on two documents to support its position
    that it had not agreed to supply and install wiring: (i) a December 8, 2006
    quote for $864,800, and (ii) a March 23, 2007 quote purporting to correct and
    remove the inclusion of wiring from its quote of the previous day. Delco
    witnesses testified they did not receive either document. Delco submitted CEL
    had fabricated the documents; and

(iii)

CEL contended that in an August 1, 2007 email
    Mr. Fornasier had stated work outside the perimeter of the building was not
    included in its quotation. Delco led evidence that it understood the email referred
    to underground duct bank work, not wiring.

[16]

The trial judge reviewed the conflicting evidence at some length and noted
    credibility was central to determining the issue. The trial judge gave several
    reasons for preferring Delcos evidence:

(i)

He accepted the evidence of Delcos expert
    that CEL could have quoted on supplying wire for the project without referring
    to Delcos SOW because CEL had the information it required to do so in other
    project documents in its possession;

(ii)

CEL witnesses testified that after making an
    oral quote to Delco, they followed up by sending a written quotation to Delco
    and two other bidding system integrators on December 8, 2006. However, the
    trial judge noted CEL did not lead any evidence from those integrators to
    counter Delcos allegation that CEL had fabricated the written quotation;

(iii)

The trial judge regarded CELs position that
    the reference to c/w wiring in the March 22, 2007 quote sent to Delco was a
    mistake as neither credible nor plausible;

(iv)

Delco had produced its fax logs for the
    period and they supported its position that it had not received the December 8,
    2006 and March 23, 2007 documents CEL contended it had sent; and

(v)

CEL did not produce its fax logs and certain
    other documents. The trial judge held CELs evidence that many or most of its
    records were lost during a computer upgrade was not believable.

Analysis

[17]

The trial judge was faced with conflicting evidence about the course of
    negotiations between the parties concerning the scope of work contained in
    their contract for the Brampton Project. It is clear from his reasons the trial
    judge accepted Delcos evidence that the contracts scope of work required CEL
    to supply and install the wiring and perform outside the perimeter work, as confirmed
    by CELs written quote of March 22, 2007.

[18]

In the course of reaching that conclusion, the trial judge rejected the
    evidence of the CEL witnesses that they had sent other quotes to Delco which
    excluded the supply and installation of wiring. One finding made by the trial
    judge was that CEL deliberately destroyed hard copy files and/or concealed
    documentation that was unfavourable to their case: para. 101. CEL submits the
    trial judge erred in reaching that conclusion because Delco did not plead the spoliation
    of documents and only raised the issue at trial. Further, CEL contends the
    trial judge erred in using a finding of spoliation to draw adverse inferences
    about the credibility of CELs witnesses.

[19]

With respect, that submission takes too narrow a view of the trial
    judges reasons. When they are read as a whole, it is apparent he gave several
    reasons for preferring the documentation adduced by Delco: (i) whereas Delco
    had produced its fax logs for the period, CEL had not; (ii) notwithstanding the
    parties were in a dispute over the scope of work by the time of the November
    2007 purchase order, Mr. Fornasier testified CEL had shredded most of its
    project file within a few years after the projects completion, with the result
    CEL could not establish it had sent its contested documentation to Delco; (iii)
    it was open to CEL to adduce evidence from other integrators in support of its
    assertion that it had sent a written December 8, 2006 quote both to them and to
    Delco, but it did not; and (iv) having listened to the explanations of the CEL
    witnesses that the March 22, 2007 quotation that included the wiring work in
    the scope of work was a mistake, he rejected their explanation as neither
    credible nor plausible. That evidence provided ample support for the trial
    judges findings about which documents CEL had or had not sent to Delco and the
    agreed upon scope of work under the contract.

[20]

Finally, I would not accept CELs submission that the trial judge failed
    to consider the evidence of its expert, Mr. Miksys, of Dejabe Construction
    Services.

[21]

Mr. Miksyss report focused on whether Delcos December 2006 SOW formed
    part of the Brampton Projects Contract Documents, in the sense that the SOW
    was prepared by the Project architect or engineer. He opined it did not, and concluded
    CEL was not required to refer to it in its quotes. The trial judge considered
    the evidence of Mr. Miksys: para. 35. However, as he was entitled to do, the
    trial judge preferred and relied on other evidence in concluding the parties
    had agreed to a scope of work that included the supply and installation of wiring.

(b)      Mitigation
    of damages

[22]

At the end of July 2008, the parties met to discuss several items in
    dispute concerning the Brampton Project, including the supply and installation
    of wiring. Delco insisted CEL perform the wiring work; CEL refused. However, by
    email dated August 6, 2008, CEL offered to quote on the installation of wiring as
    an extra as long as Delco provided certain drawings.

[23]

Delco responded on August 18, 2008, reiterating CEL had agreed on March
    22, 2007 to supply and install the wiring and, if it failed to do so, Delco
    would seek to recover from CEL any costs Delco incurred to do the work.

[24]

CEL argues that since Delco did not give it the opportunity to quote on the
    disputed work, it acted unreasonably in retaining third parties to perform the
    work. Accordingly, the trial judge erred in finding Delco acted reasonably to
    mitigate its damages.

[25]

Although a plaintiff is entitled to recover damages for the losses it
    suffers from the defendants breach of contract, the extent of those losses may
    depend upon whether it has taken reasonable steps to avoid their accumulation:
Michaels
    v. Red Deer College
(1975), 57 D.L.R. (3d) 386 (S.C.C.), at p. 390. Where,
    after the breach of a commercial contract, a defendant makes an offer to the
    plaintiff that would reduce the losses incurred, the plaintiff is generally
    required to accept a reasonable offer by way of mitigating its damages.
    However, it is always a question of fact whether it is reasonable for the
    plaintiff not to accept the breaching defendants offer:
Payzu Ltd. v.
    Saunders
, [1919] 2 K.B. 581 (C.A.), at p. 589;
Nashville Contractors
    Ltd. v. Middleton
, [1984] O.J. No. 99 (C.A.).

[26]

In the present case, the trial judge found Delco acted reasonably in not
    accepting CELs offer to quote, in part because it had lost confidence in CEL:
    paras. 108 and 110. The trial judge also found CEL had adduced no evidence that
    it would have charged less for the disputed work than what Delco ended up
    paying third parties to complete the work: para. 109. Those findings were open
    to the trial judge on the record before him. Accordingly, I see no basis to
    interfere with his conclusion that Delco had reasonably mitigated its damages.

(c)      Particular
    damage claims

[27]

CEL submits the trial judge erred in allowing Delco to recover damages
    for certain claims: (i) the cost of releasing a labour and material bond; (ii)
    the costs of an audit to ascertain the amount of conduit CEL had installed;
    (iii) overhead and profit on additional labour hours; and (iv) the additional costs
    of supplying and installing masts.

[28]

The trial judge found: (i) the bond premium was justified because CEL
    had acted unreasonably; (ii) the audit costs were reasonably necessary; (iii)
    the overhead and profit costs were standard in the industry; and (iv) the masts
    fell within the scope of work CEL had contracted to perform. CEL has not
    demonstrated any palpable or overriding error in respect of any of those
    findings. I would not give effect to this ground of appeal.

(d)      Counterclaim

[29]

CEL counterclaimed for some work it had performed outside the perimeter
    of the buildings that it contended was an extra to the contract. The trial
    judge found the work performed outside the perimeter fell within the contracts
    scope of work and dismissed the counterclaim. CEL acknowledges that if this
    court does not interfere with the trial judges conclusion on the scope of
    work, this ground of appeal fails. Given that I see no error in the trial
    judges conclusion on the scope of work, I would dismiss CELs appeal in
    respect of its counterclaim.

(e)      Summary

[30]

For the reasons set out above, I would dismiss CELs appeal in the
    Brampton Project action.

IV.

THE COLLINS BAY PROJECT (C59834)

A.

The issues

[31]

CEL engaged Delco as a sub-contractor to perform systems
    integration work on the Collins Bay Project. CEL submits the trial judge erred
in finding the scope of work in the contract did not
    require Delco to perform the task of terminating the field devices. In addition,
    Mr. Fornasier submits it was an error for the trial judge to hold him jointly
    liable with CEL for damages to Delco on the basis that he was liable under s.
    13(1) of the
CLA
for CELs
    breach of its trust obligations under s. 8 of the Act.

B.

The scope of work

[32]

CEL submits the June 15, 2005 purchase order it issued to Delco was the
    best evidence of the scope of work agreed to by the parties for the Collins Bay
    Project and therefore the trial judge erred in holding the purchase order did
    not delineate the scope of work between them. I would not accept this
    submission.

[33]

The trial judge was faced with a situation in which there was no
    document signed by both parties setting out the terms of their agreement. In
    those circumstances, he was required to review all the evidence  both
    documentary and testimonial  to determine, on a balance of probabilities,
    whether the parties reached an agreement on the scope of work and, if they did,
    the terms of that agreement.

[34]

As in the case of the Brampton Project, the trial judge was faced with
    conflicting evidence from the parties about the terms of the scope of work for
    the Collins Bay Project. Prior to the close of tenders in early January 2005,
    Delco had sent several versions of a scope of work document to CEL (and to
    eight other electrical contractors who were bidding on the project) that
    specified the electrical contractor would be responsible for terminating the
    field devices (the SOW). Before the close of tenders, Delco provided CEL with
    two price quotes for the work described in the SOW. Delcos evidence was that
    the deal it struck with CEL for the work just before the close of tenders was
    based on CEL accepting Delcos proposed SOW.

[35]

Mr. Fornasier testified that before the close of tenders he spoke with Grant
    Lagimodiere at Delco to advise that CEL would only work with the company if Delco
    supplied and installed a complete ISS, including the termination of field
    devices. Mr. Lagimodiere denied the conversations took place.

[36]

The parties met in May 2005, after the general contractor informed CEL
    it had accepted CELs bid. The CEL witnesses testified the scope of work was
    discussed at the meeting, with Delco responsible for the termination work. Mr.
    Lagimodiere denied any such discussion had taken place.

[37]

Finally, on June 15, 2005, CEL issued a purchase order to Delco to
    supply and install fixed point alarm system, door control and card access
    system, CATV system, PA communication system, CCTV system and guard tour
    system. The document did not indicate whether it included termination work.

[38]

Delco began to work on the Collins Bay Project. A dispute about the
    scope of work did not arise until May 2006, when CEL told Delco it was required
    to perform the termination work. Delco did so, but under protest.

[39]

The trial judge preferred the evidence of Delco and concluded the scope
    of work for Collins Bay Project did not require Delco to perform termination
    services. He noted the evidence from both parties was consistent on a key
    point: the terms of the contract were finalized before the close of tenders in
    January 2005, several months before CEL issued its purchase order. After
    considering the contents of Delcos SOW and CELs purchase order, as well as the
    circumstances surrounding their creation and issuance, the trial judge concluded
    Delcos documents more reliably described the scope of work.

[40]

The trial judge gave several reasons for this conclusion: (i) the Delco
    documents explicitly dealt with the division of work between the integrator and
    electrical contractor, whereas the purchase order did not; (ii) three
    witnesses, including a CEL employee, Thierry Segers, testified the scope of
    work was that set out in Delcos SOW; (iii) it was inconceivable that Mr. Fornasier
    would not have documented any discussed changes to the scope of work before the
    close of tenders; and (iv) CEL performed work that should have been done by
    Delco according to its own purchase order, indicating the parties did not
    consider the work described in the purchase order accurately reflected their
    agreement.

[41]

The appellant submits the trial judge misapprehended the evidence of Thierry
    Segers concerning his discussions with Delco prior to the close of tenders. I
    do not agree. The trial judges reasons accurately summarize Mr. Segers
    evidence on cross-examination that Delcos reduced price quotations were based
    on Delcos SOW that had been emailed to CEL: para. 146. He then accurately
    summarizes Mr. Segers evidence in chief about his understanding of the
    parties respective work responsibilities: para. 164. The trial judge held the
    best evidence about the terms of the contract was found in Delcos SOW, which was
    supported by the evidence of Delcos witnesses and Mr. Segers. That conclusion
    was open to the trial judge to make in light of Mr. Segers evidence.

[42]

The trial judge considered the relevant evidence, made findings of
    credibility, and explained why he preferred Delcos evidence over that of CEL.
    The appellant has not demonstrated that the trial judge made any palpable or
    overriding error in concluding the terms of the scope of work agreed to by the
    parties did not require Delco to perform the termination work. I see no basis
    upon which to interfere with that finding or the trial judges further
    conclusion that CEL breached the agreement by refusing to undertake the
    termination work.

C.

Construction Lien Act
breach of trust

[43]

Under s. 8(1) of the
CLA,
all amounts received by a contractor
    on account of the contract price of an improvement constitute a trust fund for
    the benefit of sub-contractors and other persons who have supplied services or
    materials to the improvement who are owed amounts by the contractor. Section
    8(2) prohibits a trustee contractor from appropriating or converting any part
    of the fund to the contractors own use, or to any use inconsistent with the
    trust, until all sub-contractors are paid all amounts owed to them by the
    contractor related to the improvement. Any officer, director or person who has
    effective control of a corporation is liable, under s. 13(1), for the
    corporations breach of trust if the person 
assents to, or
    acquiesces in, conduct that he or she knows or reasonably ought to know amounts
    to breach of trust.

[44]

The trial judge found CEL failed to protect or pay to Delco trust funds
    relating to the Collins Bay Project. As well, he found that Mr. Fornasier,
    CELs principal, knew or reasonably ought to have known that CELs withholding of
    funds from Delco amounted to a breach of trust by CEL.

[45]

CEL submits the trial judge erred in making those findings because Delco
    did not call evidence about whether the general contractor, Bondfield, had paid
    funds to CEL that CEL then failed to pay to Delco.

[46]

A plaintiff alleging a breach of the s. 8 trust bears the initial onus of
    proving the existence of the trust by showing the contractor received monies on
    account of its contract for the project and the plaintiff supplied services or
    materials to the improvement. The onus then shifts to the contractor to show
    its payment of trust funds complied with the
CLA
:
Emco Corp. v.
    Ontario Trenchless Construction Ltd.
(2007), 65 C.L.R. (3d) 33 (Ont.
    S.C.), at para. 9. The party seeking to attach liability to the individual
    director or officer must demonstrate the elements required by s. 13(1):
Belmont
    Concrete Finishing Co. v. Marshall
, 2012 ONCA 585, 15 C.L.R. (4th) 1, at
    para. 10.

[47]

The evidence before the trial judge on this issue was brief: Mr. Fornasier
    admitted the general contractor, Bondfield, paid CEL for the work specified in their
    contract; CEL was not able to obtain from Bondfield any additional funds for
    the termination work that Delco claimed was an extra; and CEL paid Delco all
    the money it received from Bondfield in connection with the Delco SOW. In sum,
    the evidence showed CEL paid to Delco all funds it received from the general
    contractor for the work covered by the sub-contract between CEL and Delco.

[48]

The trial judges reasons do not explain the basis for his findings of a
    breach of trust under s. 8(2) of the
CLA
or Mr. Fornasiers personal
    liability under s. 13(1). In my view, although the funds received by CEL from
    Bondfield were impressed with a trust pursuant to s. 8(1) of the
CLA
,
    the evidence did not amount to Delco demonstrating, on a balance of
    probabilities, that Mr. Fornasier had assented to, or acquiesced in, conduct
    that he knew, or reasonably ought to have known, amounted to a breach of trust
    by CEL.

[49]

Consequently, I would allow Mr. Fornasiers appeal in respect of his
    personal liability under s. 13 of the
CLA
. It follows that I would
    dismiss Delcos cross-appeal from the refusal of the trial judge to grant a
    declaration that the judgment against Mr. Fornasier survives a bankruptcy pursuant
    to s. 178(d) of the
Bankruptcy and Insolvency Act
.

V.

DISPOSITION

[50]

For the reasons set out above, I would dismiss the appeals of CEL. I
    would allow the appeal of Carlo Fornasier and would set aside the judgment against
    him in the Collins Bay Project action.  I would dismiss Delcos cross-appeal in
    the Collins Bay Project action.

[51]

At the hearing, counsel agreed the successful party on the appeals was
    entitled to costs of $21,000 for the Brampton Project appeal and $12,500 for
    the Collins Bay Project appeal, both inclusive of HST and disbursements.

[52]

As Delco was successful on the Brampton Project appeal, I would award it
    costs of $21,000.

[53]

On the Collins Bay Project appeal, Delco successfully resisted CELs
    appeal, but Mr. Fornasier succeeded on his appeal. Counsel advised they had not
    discussed the quantum of costs in the event only part of an appeal was allowed.
    In his notice of appeal, Mr. Fornasier did not seek costs. In those
    circumstances, I would award Delco costs of the appeal, but fixed at a reduced
    amount of $10,000, payable by CEL.

Released: KF (July 27, 2016)

David Brown J.A.

I agree K. Feldman J.A.

I agree E.E. Gillese J.A.


