The Ontario Superior Court of Justice decision in Walsh Construction v Toronto Transit Commission, 2024 ONSC 2782 addresses the issue of subcontractor flow-through claims. Flow-through claims are where a general contractor, in this case Walsh Construction (“Walsh”), flows through a subcontractor’s claim against the general contractor to the owner. In doing so, the general contractors can attempt to recover damages from owners on behalf of subcontractors. Walsh, as the general contractor for a transit station, attempted to “flow-through” delay claims from its subcontractors to the Toronto Transit Commission (“TTC”), the project owner. The Court, however, ruled against Walsh. According to the Court, for a flow through claim to lie against an owner, the general contractor must be at least potentially liable to its subcontractors for the underlying claim.
Amongst other things, the Court made the following points in coming to its conclusion:
- Privity of Contract: The Court confirmed that there was no direct contractual relationship between TTC and Walsh’s subcontractors. Since TTC had no agreement with the subcontractors, they could not directly sue the TTC for damages. As a result, flow-through claims are a procedural tool that allows general contractors to pass subcontractor claims to the owner. However, for such claims to be valid, the general contractors must have a potential liability to the subcontractor for the damages being claimed.
- Release of Liability Extinguishes Flow-Through Claims: Walsh had settled with its subcontractors through two types of “liquidating agreements”. These agreements released Walsh from any further liability to its subcontractors for the claims in question. One type of agreement involved an assignment of the claim to Walsh, while the other involved a conditional agreement where Walsh would pay the subcontractors a portion of any recovery from the owner. The critical issue was that Walsh had been released from liability, which meant they were not entitled to recover those damages from TTC.
- Court’s Ruling: The Court held that since Walsh had been fully released from any liability to the subcontractors, there was no legal basis for TTC to be held responsible for the subcontractor claims. The Court emphasized that flow-through claims are only valid if the general contractor retains potential liability to the subcontractor.
- Concerns about Liquidating Agreements: The Court expressed concerns about the fairness of using liquidating agreements to shift subcontractor claims to owners, particularly when the contractor had effectively removed itself from responsibility for the claims. It noted that such agreements could remove the contractor’s incentive to scrutinize or minimize the subcontractor claims, which could result in passing on unvetted or unsupported claims to the owner.
The Walsh case has several important take-aways for general contractors, including:
- Flow-through Claims and Release Agreements: general contractors should be cautious when entering into liquidating agreements that fully release them from liability for subcontractor claims. Such releases can undermine the legal foundation for a flow-through claim against the owner.
- Due Diligence: general contractors may be expected to demonstrate some diligence in vetting subcontractor claims before seeking to pass them along to the owner. The Court’s decision suggests that general contractors cannot simply rely on liquidating agreements to avoid their responsibility for properly assessing claims.
The Walsh Construction case establishes that general contractors cannot rely on liquidating agreements to bypass their responsibility for subcontractor claims. For flow-through claims to be successful, the contractor must retain potential liability to the subcontractor, and due diligence is required in assessing the claims before seeking recovery from the owner.