Construction Estimates and Failure to Agree on Contract Pricing
As the court observed in its recent decision, All Out Contracting Ltd. v Gourlay, 2020 BCSC 481 (CanLII) (“All Out”), construction work begins before the owner(s) and contractor properly define their contractual relationship, if they ever do so. As was the case in All Out, this frequently leads to disputes and litigation as the parties’ differing expectations of the performance and price of the contract cause disputes.
In All Out the contractor gave an estimate for the tear down and replacement of a retaining wall for between $80,000 to $100,000. The estimate was signed and the work commenced. As work progressed, debris and unstable fill were discovered behind the existing wall and additional efforts were required to provide the existing house with vertical support resulting in work being more complicated than originally anticipated. The contractor invoiced ~$206,500 but the owners paid $140,000 and refused to pay any more.
The estimate explicitly provided that “The amount estimated to complete the job is an estimate only and the job is subject to increased costs based on the circumstances on the Premises and the nature of the job…”. The estimate also provided that the contract price would be a set price plus costs with the set contract rate listed under the contract price heading being between $80,000 to $100,000.
Part way through the work, a further estimate of the costs of the work done to date and remaining to be done was prepared by the contractor which totalled ~$162,500. When the work was completed and the ~$206,500 total was presented, the owners refused to pay more than the $140,000 they paid to date and took the position that the original $80,000 to $100,000 estimate capped the amounts the contractor could claim.
Relying on the seminal decision of Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at paras. 57-58, the court began the analysis of what the terms of the contract were gleaned from contract itself as informed by the surrounding circumstances.
The court held that the signed agreement was an estimate only with the parties having created the expectation of a cost-plus contract. Specific terms of the cost-plus arrangement were not agreed to. Having failed to negotiate the formula for compensation, the court was required to turn to the doctrine of quantum meruit, which can be briefly summarized as the notion that a party should receive fair compensation for work that is done in anticipation of compensation.
The court canvassed the law concerning quantum meruit including the notions that the remedy is flexible, contextual and will look to surrounding circumstances to determine what is fair and reasonable compensation, including the signed estimate. The court assessed 7% as a fair profit margin, adjusted claims for costs based on the facts and information before it and assessed that the amount claimable on a quantum meruit basis would be $162,194.50 leaving $22,194.50 plus court costs to be paid by the owners.
All Out underscores the importance of parties entering into clear and mutually understood contractual relations. It was no doubt a stressful and costly exercise to have the court essentially determine for the parties contractual terms they could have negotiated for themselves. It is never prudent to assume that a price or contractual terms can be agreed upon after work has commenced if they cannot be agreed upon prior.
For additional information on failures to properly negotiate contractual terms and pricing and disputes related to those issues, please consider my previous articles:
- What One Has Earned – Courts Impose Compensation Where Parties Fail to Solidify a Contract
- Construction Disputes: A Contractor’s Right to be Paid vs. Owner’s Claims for Defective Work
- Contractual Terms by Convention: When Parties Fail to Explicitly Set Contractual Terms
Jeremy Burgess is a litigation associate at Pushor Mitchell with broad experience in litigation including a focus on construction related issues. If you have any questions about a legal dispute, we’d be happy to assist you. Feel free to contact Jeremy in a confidential manner toll free at 1-800-558-1155 or at firstname.lastname@example.org. You may also contact our litigation group.
The foregoing is for informational purposes only and is not legal advice, nor should be construed as such.