Fraud allegations, verbal contracts, cash payments and disputed ownership over a Ferrari were at the centre of a recent Ontario Superior Court decision that clarified the application of several contract and tort issues in the context of a construction project.

In 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672, the Court addressed a host of disputed issues, including the fiduciary duty (or lack thereof) of a site supervisor to the general contractor, the requirements to prove civil fraud, the purpose of damages for breach of contract and claims for lost profits following repudiation of a contract.

Key Takeaways

• Verbal contracts, claims for completed work, or allegations that work was deficient, incomplete, incorrect, contained errors, or fell below industry standards are all challenging to prove years later without contemporaneous documentation.
• In determining whether a site supervisor is a fiduciary to a general contractor, Courts will look to the site supervisor’s decision making process, knowledge of the construction industry, and the availability of referrals to determine whether they were “peculiarly vulnerable” to the general contractor.
• Civil fraud is treated by the courts as a serious allegation of dishonesty and must be pled with precision and particularity. The party claiming fraud must make reasonable efforts to assess the quantum of its losses, unless this would be too complex to calculate.
• Damages for breach of contract in the construction context are intended to restore the aggrieved party to the position they would have been in had the contract been performed, subject to any unique circumstances or understandings between the parties.

Background

2225955 Ontario Ltd. (“222 Ontario”), and its principal, John Duca, purchased an empty plot of land in Vaughan in 2010 to construct a commercial building that would house Mr. Duca’s pre-owned luxury sports car dealership. Mr. Duca acted as his own general contractor and hired 1814219 Ontario Inc. (“181 Ontario”) and its principal, Umberto Mauti, to provide excavation services, along with Giuseppe Villano as the site supervisor.

Before ground broke, geotechnical reports found that the building’s foundation would need to reach 5.5-6.5 metres below ground level to reach load-bearing soil. Mr. Duca did not review the reports, and the building’s architectural drawings only called for foundations reaching 2.6 metres below ground level. When the project began, The excavated soil was full of debris and had to be trucked offsite despite Mr. Duca’s insistence that it could be spread elsewhere on the property. Disputes also arose over the depth of the building’s foundation and who would pay for the installation of curbs, driveways and ramps. As the delays increased, so too did the project’s cost. Mr. Duca claimed to have many unwritten agreements with Mr. Mauti and Mr. Villano. Requests for payment were often made via text message and Mr. Duca made many of his payments in cash. Mr. Duca even agreed that part of Mr. Villano’s compensation as site supervisor would include one of the dealership’s Ferraris. By the end, 222 Ontario and Mr. Duca could not keep up with the invoices, and both Mr. Mauti and Mr. Villano registered liens on the property. Four separate actions arose between Mr. Duca, Mr. Mauti and Mr. Villano.^[1]

The Court’s Reasons

The Court divided its reasons into eight “main issues”, three of which provide insight into how similar circumstances may be addressed in construction litigation:

Issue #1: Mr. Villano was site supervisor, but did not owe a fiduciary duty to 222 Ontario

The Court cited the Supreme Court of Canada’s (“Supreme Court”) decision in Alberta v. Elder Advocates of Alberta Society, which states a “fiduciary duty” requires that the fiduciary act with “absolute loyalty” towards the beneficiary in managing their affairs.^[2] A fiduciary duty can arise automatically due to the very nature of a particular relationship (such as executor-beneficiary, agent-principal and director-corporation), or can arise in any relationship where:

1. The fiduciary has scope to exercise some discretion or power;
2. The fiduciary can unilaterally exercise that power to affect the beneficiary’s interests in an adverse way;
3. The beneficiary is “peculiarly vulnerable to or at the mercy of” the fiduciary;
4. The fiduciary has agreed to act in the best interests of the beneficiary; and
5. There is a defined person or class of persons vulnerable to that fiduciary’s control.^[3]

In this case, Mr. Duca argued that Mr. Villano was a fiduciary to the corporation because of his responsibilities which included ordering equipment and materials without seeking approval and keeping Mr. Duca up to date on which invoices needed to be paid. The Court disagreed, finding Mr. Villano was not a fiduciary to the corporation because Mr. Villano determined his own work hours, or that he advised Mr. Duca which invoices needed to be paid since Mr. Duca paid most of them without complaint.^[4] The Court also found that Mr. Duca sought out Mr. Villano for the site supervisor position despite being surrounded by qualified professionals who he could have asked for references, but chose not to.^[5]

Issue #2: Neither Mr. Mauti, Mr. Villano or any of the other contractors perpetrated a fraud against Mr. Duca

The Court cited the Supreme Court in Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, which states that civil fraud requires proving, with “precision and particularity”,^[6] that:

1. The defendant made a false representation;
2. The defendant had “some level of knowledge” (or was reckless to the fact) that the representation was false;
3. The false representation caused the plaintiff to act; and
4. The plaintiff’s actions resulted in a loss.^[7]

The Court disagreed with Mr. Duca’s allegations that Mr. Villano, Mr. Mauti and 181 Ontario collaborated to fraudulently maximize the expense of the project, finding that Mr. Duca was not pressured to hire Mr. Villano and that Mr. Duca witnessed the excavated soil being trucked off the property and paid for it without complaint until after the litigation began.^[8]

In civil fraud cases, the plaintiff only needs to make reasonable efforts to assess the quantum of the losses they suffered as a result of the alleged fraud, unless calculating the loss would be too complicated. However, the Court found Mr. Duca did not sufficiently try to assess his loss despite having access to every single delivery slip, all stone tickets and the number of truckloads of soil which were taken off the property.^[9]

Issue #3: 181 Ontario and Mr. Mauti are entitled to full payment from 222 Ontario and Mr. Duca

The Court stated that damages for breach of contract are intended to put a party in the position that it would have been in had the contract been properly performed, provided the loss being claimed flows “unavoidably” from the breach of contract.^[10] Meanwhile, damages for loss of profits will be based on what can fairly and reasonably be expected from the contract’s breach, as well as what the parties understood and anticipated at the time of the contract’s formation.^[11]

In this case, Mr. Duca alleged that 181 Ontario and Mr. Mauti fabricated extras, charged for work that was not done, and that their work which was done was grossly overcharged and fell below industry standards.^[12] None of these allegations were accepted by the Court. It found that 181 Ontario completed all the work and supplied the materials for which it invoiced, and Mr. Duca did not dispute any of the invoices until after 181 Ontario registered its lien in accordance with the Construction Act, R.S.O. 1990, c. C.30. There was no evidence that 181 Ontario’s work was incorrect, contained errors or that it fell below industry standards.^[13]

In the end, the Court ordered 222 Ontario and Mr. Duca to fully compensate 181 Ontario and Mr. Mauti the lien amount of over $347,000, nearly $30,000 for loss of profits, a $22,000 invoice which was not included in the lien, and pre and post judgement interest.^[14]

Concluding Thoughts

This lengthy decision underscores the importance of contemporaneous documentation to support claims on construction projects to avoid dismissals at trial. The relative strength or weakness of claims is best assessed on the documentary record, not contested oral evidence in the witness box.

[1] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 8.

[2] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 306 citing Alberta v. Elder Advocates of Alberta Society, 2011 SCC 24 at para. 22 (“Elder”)

[3] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 311-315 citing Frame v. Smith, [1987] 2 SCR 99 at p. 136, Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 SCR 574 and Winter v. Sherman, 2017 ONSC 5492 at para. 38.

[4] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at paras. 319-331.

[5] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at paras. 321-334.

[6] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 341 citing J.A.L. Developments Inc. v. Residences of Springhill Inc., 2019 ONSC 177 at para. 36.

[7] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 337 citing Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8 at para. 21.

[8] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at paras. 366, 369 and 382.

[9] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 349.

[10] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 404 citing Cornelius Grey Construction Inc. v. Folz, 2018 ONSC 647 at para. 15.

[11] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 409 citing Hadley v. Baxendale (1854), 9 Exch 341, at para. 3.

[12] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 405.

[13] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 407.

[14] 1814219 Ontario Inc. v. 2225955 Ontario Ltd., 2023 ONSC 4672 at para. 415.