Understanding Flow-Through Costs in Construction Contexts: Insights from Walsh Construction v. Toronto Transit Commission

There have been very few Canadian cases dealing with flow-through claims. Fortunately, the recent case of Walsh Construction v Toronto Transit Commission et al., 2024 ONSC 2782, provides valuable guidance for parties advancing flow-through claims in construction contexts.

Facts:

In 2011, the Toronto Transit Commission (“TTC”) and Walsh Construction Company Canada (“Walsh”) entered into a contract for the construction of the Steeles Subway Station, later renamed the Pioneer Village Station. The initial contract was for $165,925,000. Substantial performance was to be achieved by Walsh on November 5, 2014, while final completion was to be achieved by February 4, 2015. The actual substantial performance date, however, was not achieved until June 15, 2017 (953 days later than the original substantial performance date), and final completion was achieved on November 7, 2018.

As expected, both parties attributed liability to one another and disagreed on the delay causes. Walsh’s position was that much of the delay resulted from the TTC’s incomplete design at the time of the contract award to Walsh, compounded by Walsh’s inability to obtain full site access within the timelines in the contract and the TTC’s improper administration of the contract. The TTC raised several arguments in support of its position and broadly claimed that both parties should bear responsibility for cost and time overruns, particularly for a project of this size and complexity. At trial, the Ontario Superior Court found the TTC responsible for 1,047 days of delay.

The certified value of the contract was $223,267,711 inclusive of taxes, representing more than a $57,300,000 increase from the original contract price. Walsh’s overall contract claim against the TTC was for $193,000,000 and included the claims of 22 Walsh subcontractors for their extended time on the project.

This case presents a lengthy analysis on a number of different issues, however, a key issue explored was whether Walsh could successfully assert a flow-through claim for its subcontractors’ delays and acceleration costs.

Subcontractor Claims

Walsh raised two claims on behalf of its subcontractors in its claim for damages, being delay costs allegedly incurred by the subcontractors and subcontractor acceleration costs.

Walsh argued that although the subcontractors did not have contracts with the TTC, Walsh is entitled to recover from the TTC the damages which its subcontractors are entitled to recover from Walsh by reason of TTC’s breaches. Walsh argued the subcontractor claims were recoverable from the TTC as they would otherwise “disappear into a black hole” and could lead to additional disputes, litigation and lien claims by the subcontractors against the general contractor.

On the other hand, the TTC argued that Walsh cannot flow through the subcontractor claims to the TTC as Walsh had entered into various agreements with most of its subcontractors that released Walsh from liability. These agreements included:

1. Assignment Liquidating Agreements: Walsh paid its subcontractors all the amounts due and payable. In exchange for the payment, the subcontractor assigned its claim to Walsh and released Walsh from liability.
2. Non-Assignment Liquidating Agreements: Walsh paid an amount representing the contract payments due and payable to the subcontractor in exchange for a release of Walsh. If Walsh were to recover anything from the TTC with respect to the subcontractor claims, it would pay the subcontractor less a percentage for overhead, mark-up and costs incurred.

In these circumstances, Walsh released itself from future liability of its subcontractors. The Court stated that a flow-through claim is a procedural device only. It does not create a new cause of action between a subcontractor and TTC as there is no privity of contract between them. Accordingly, in this particular instance, for Walsh to pass liability on to the TTC on a flow-through claim, there must be liability, or potential liability, between Walsh and its subcontractors.

Walsh faced no liability. Walsh had settled most payments with its subcontractors under the assignment liquidating agreements where, in exchange for payment, Walsh was released from liability from any and all claims related to the project, including delay. With Walsh’s non-assignment liquidating agreements, Walsh had no liability as payment was dependent upon recovery from the TTC.

The Court dismissed Walsh’s claim and determined that Walsh could not flow through the claims of the subcontractors as Walsh had no liability between itself and the subcontractors.

Take-Aways:

Contractors should be aware of the limitations of advancing flow-through claims and the nature of the agreements made with subcontractors concerning liability. While it is common for contractors to resolve their subcontractor claims and later take assignment of these claims to streamline litigation, courts might not advance flow-through claims if there is no evidence of liability between contractors and subcontractors.

By Rapti Ratnayake