Limitation Periods and Construction Invoices: 1838120 Ontario Inc. v. Township of East Zorra-Tavistock

Introduction

Anyone who has provided services or materials in the construction industry has likely run into the issue of non-payment of their invoices. Payees usually hope that a payment dispute can be resolved before a lawsuit is required to be commenced. But how do you determine when the limitation period begins to run for an unpaid invoice, and in turn, the deadline for when a lawsuit must be commenced? Does the ‘clock’ start when the work is performed, or the materials supplied? Does it start when an invoice is issued and provided to the payor? Does each invoice come with its own limitation period, such that multiple lawsuits may be required? The recent case of 1838120 Ontario Inc. v. Township of East Zorra-Tavistock, 2021 ONSC 3341, is of assistance in answering these questions.

Overview of Facts and Dispute

The dispute in this case arose out of the reconstruction of certain roads, sewers and sidewalks in Tavistock, Ontario (the “Project”). The Township of East-Zorra Tavistock (“Tavistock”) retained K. Smart Associates (“K. Smart”) as its consulting engineer and 1838120 Ontario Inc. (“183”) as its contractor on the Project.

The bulk of the work took place during the summer of 2015. There was some dispute as to when the Project was completed. 183 was able to point to an inspection record showing that some work was performed on September 28, 2015, but was unable to provide evidence that it performed any work beyond that date.

The contract provided for the issuance of Progress Payment Certificates on a monthly basis. K. Smart issued four Progress Payment Certificates:

• #1, for work done through July 31, 2015, recommended for payment on August 6, 2015;
• #2, for work done through August 31, 2015, recommended for payment on September 17, 2015;
• #3, for work done through September 30, 2015, recommended for payment on October 7, 2015; and
• #4, for work done through October 31, 2015, recommended for payment on November 15, 2015.

K. Smart issued a revised certificate #4, which was also for work completed through October 31, 2015, and which was recommended for payment on December 22, 2015. This was the last Progress Payment Certificate issued for 183’s work on the Project.

On October 25, 2017, 183 commenced an action and claimed payment of $134,502.71 from Tavistock, as well as a declaration that the work performed was substantially complete. 183’s claim related to ‘extra’ work it claimed was performed at the request of Tavistock, primarily relating to changes to the scope of work. The most substantial change was that the contract called for the use of native backfill. 183’s statement of claim alleged that the native soil was of poor-quality clay and was not suitable for use as backfill, which required 183 to remove the native soil and supply granular backfill. The first time that 183 claimed for the extras was in a May 5, 2016 letter written by its counsel.

Tavistock brought a motion for summary judgment to dismiss 183’s action on the basis that there was no genuine issue requiring a trial. It stated that 183’s claims should be dismissed for the following reasons:

1. The monies allegedly owing were for “extras” that were never approved in writing by the defendant.
2. The plaintiff’s claims should have been raised in an earlier action which was commenced by a sub-trade and it was an abuse of process to “relitigate” the issues in the later proceeding.
3. The plaintiff’s claim was for work done and materials supplied in July and August of 2015. The statement of claim was not issued until October 25, 2017. As such, the claims were statute barred.
4. The plaintiff could not demand final payment on the contract because it failed to comply with the contractual terms regarding the issuance of a Certificate of Substantial Performance, particularly the requirement that it provide a statutory declaration that all sub-trades were paid.

The principal and sole director of 183, Mr. Vozza, filed an affidavit on the motion wherein he expanded on the particulars of the amounts he claimed were previously invoiced and claimed in 183’s statement of claim. In his affidavit, he also included amounts which were not previously claimed, and which increased the amount claimed in the statement of claim by more than double. Some of the amounts were supported by invoices attached as exhibits to Mr. Vozza’s affidavit.

Although the amounts being claimed were not at issue on the motion, Justice Heeney noted that the changes to the amounts claimed, “made long after the fact”, left him “with the impression that Mr. Vozza is making these numbers up as he goes along” and led him to draw the “inescapable” inference that “these invoices have been manufactured years after the work was done and have been backdated”. In addition, Justice Heeney found that, “The fact that nine of these invoices are dated October 26, 2015, suspiciously amounting to two years less one day prior to the date the statement of claim was issued, supports the same inference”.

Issue #1: The monies allegedly owing are for “extras” that were never approved in writing by Tavistock

For its authority to remove the native soil and replace it with granular backfill and then bill Tavistock for the extra costs, 183 relied on a job site inspection report of K. Smart’s inspector. However, the report only stated that the existing material’s moisture content was not optimal, not that it was required to be replaced. The report provided two options: one to replace the soil, the other to wait for the soil to dry out. Tavistock’ s position was that it did not approve the removal or replacement of the native soil.

Justice Heeney noted that 183 should have sought Tavistock’s input and agreement on which of the two options to choose. In addition, he noted that the extra costs claimed for this item were significant, that previous changes to the contract had been made in writing and that, although counsel did not direct him to any provision in the contract that required it, “it is entirely reasonable to expect the parties to agree on both scope and cost of any proposed extras in advance and in writing…” He determined that resolution of this issue would require a trial, subject to his rulings on the other issues.

Issue #2: The action constitutes an abuse of process

Tavistock argued that the action should be dismissed because 183 had an opportunity to advance these issues in a previous action against one of 183’s subtrades but did not do so. As such, Tavistock argued it would be an abuse of process to “re-litigate the issues that were decided as between the parties” in the earlier action.

On this issue, Justice Heeney determined that, while it can constitute an abuse of process to attempt to relitigate issues that have already been decided, the issues were different between this case and the previous subtrade action, and 183’s claims should not be dismissed on this ground.

Issue #3: The plaintiff’s claims are statute-barred

The most noteworthy section of the decision is with respect to the issue of when 183’s limitation period began to run, which is the date the claim is “discovered”, as defined in s. 5(1) of the Limitations Act, 2002 (the “Act”).

Justice Heeney begins his analysis of this issue by outlining the approach to be taken in determining when the limitation period begins to run in relation to a claim for services performed, as set out in G.J. White Construction Ltd. v. Palermo (“G.J. White”).^[1] In that case, Justice Nordheimer stated that the time the limitation period begins to run “is neither the time that the work was done nor is it the time when the invoice was delivered”. He examined the practice of the parties with respect to payments on the project to determine a reasonable period for delivery of an invoice and payment of the invoice to help determine when the limitation period began to run.^[2]

Does this mean a payee can wait to issue an invoice and prevent the limitation period from running indefinitely? No, payees cannot ‘toll’ the limitation period by delaying the issuance of an invoice and must issue invoices within a reasonable period of time.^[3] Generally, in a construction case, “the contractor knows, at the moment the work is done, that he has a claim against the customer because he is not doing the work for free. However, he could not reasonably expect to be paid for that work until he renders a proper invoice. Once he does so, if the invoice is not paid within a reasonable time, the customer is in default, and from that point forward it would be [legally] appropriate for the contractor to commence a proceeding if it remains unpaid”.^[4]

Justice Heeney declined to follow Newman Bros. Ltd. v. Universal Resource Recovery Inc.^[5], which 183 relied on to argue that the court should not look at individual invoices and determine a separate limitation period for each, based on when that invoice should reasonably have been issued and when it should reasonably have been paid, because to do so would be unduly onerous on the parties. He disagreed that a ruling that separate limitation periods apply to each invoice would require separate actions to be commenced at different times, resulting in a potential waste of judicial resources. Rather, in his view, “having multiple limitation periods merely puts the onus on the contractor to keep track of when his invoices have been issued (assuming that they were issued within a reasonable time), so that he can ensure that an action is commenced within two years after the date that the earliest one should reasonably have been paid”. Further, “giving consideration to things such [as] promises of payment followed by partial payments injects precisely the unacceptable element of uncertainty into the law of limitation of actions that Sharpe J.A. cautioned against” in Federation Insurance Co. of Canada v. Markel Insurance Co. of Canada.^[6]

What if the parties are engaged in discussions regarding payment of the invoice or are considering a compromise on the invoiced amounts or the terms of payment? None of these steps would delay the commencement of the limitation period.^[7] The court has held that the payee must commence a lawsuit within two years from the date the reasonably delivered invoice goes into default on the reasonable due date, in other words once “discovery” has occurred.^[8] In sum, while recognizing that it was decided under the pre-2002 Limitations Act, Justice Heeney determined that G.J. White provides a framework for addressing the issue of discoverability in cases such as the case at bar as follows:

The limitation period on an invoice, issued for having supplied goods and services in accordance with a contract, does not commence at the time the goods and services are supplied or at the time the invoice was issued and submitted to the payors. Instead, it commences after a “reasonable” period of time has passed for the invoice to be issued and a “reasonable” period of time has passed for the invoice to be paid. What is “reasonable” is context- and circumstance-dependent and follows the parties’ contract and the parties’ past practices with respect to when invoices were issued and submitted and when payments were made.^[9]

Applying the framework set out in G.J. White to the case before him, Justice Heeney determined that, “since each Progress Payment Certificate was supposed to pay 183 for work done up to the end of that particular month, it follows that 183’s invoices for work done up to the end of that particular month should have been submitted prior to the end of the month so that they could be included. This represents the ‘reasonable’ period for the submission of invoices. The Progress Payment Certificates also prescribe a specific date for payment within each certificate, which represents that ‘reasonable’ date for payment”.

The evidence was that Tavistock paid the certified amounts within days of the date recommended for payment. As such, the limitation period commenced the day after the date recommended for payment with respect to each certificate. Most of the extras being claimed by 183 related to work performed in July 2015. As such, 183 was reasonably expected to invoice for that work by the end of July 2015 and would reasonably have expected to be paid for the work on August 6, 2015. The limitation period therefore commenced on August 7, 2015. The same analysis applied to extras allegedly performed in the other months. As there was no evidence of work performed after September 28, 2015, the limitation period for 183 to claim for any outstanding amounts for work performed in September 2015 commenced on October 8, 2015. The statement of claim was issued on October 25, 2017, more than two years after 183’s claim was “discovered”, and the limitation period began to run. Therefore, Justice Heeney concluded that there was no genuine issue requiring a trial on the limitations issue as 183’s claims were barred by s. 4 of the Act.

Issue #4: Failure to provide the necessary statutory declaration

183 was required to provide a statutory declaration pursuant to the contract. It failed to do so, and no Certificate of Substantial Performance was issued. Pursuant to the contract, Tavistock was only obligated to pay, and 183 was only entitled to receive, the final payment on the contract once 45 days had expired from the date certified to be the date of substantial performance.

Justice Heeney noted that “the requirement for a statutory declaration that all subtrades have been paid is not a mere formality”. Rather, it is required by owners in order to ensure that the monies the contractor is demanding are not subject to a trust in favour of an unpaid subtrade pursuant to the Construction (Lien) Act. Accordingly, he determined that 183 had no contractual right to demand payment and its claims had to be dismissed.

Conclusion

Justice Heeney granted Tavistock’s motion for summary judgment and dismissed 183’s action based upon his rulings with respect to issues #3 and #4.

This decision highlights several important considerations for parties to construction contracts. First, it underscores the importance of invoicing properly, within a reasonable period of time and in accordance with the contract. Proper invoices, among other things, include all amounts owing for work performed during the payment period of the invoice, including extras. Payees should ensure that extras are approved in writing prior to being performed. It is also prudent to include a deadline for payment on the face of the invoice.

The decision is a reminder to be mindful of invoicing practices, particularly allowing invoices to be negotiated or paid late, as a court may later take these practices into account when determining when the relevant limitation period commenced. It is also important to remember that such negotiations do not toll the running of the limitation period, and lawsuits must be commenced within two years of discovery having occurred.