A Collapsing Construction Project without a Contract: Sorting out the Parties’ Rights
Whenever parties fail to fully document the contractual agreement between them, the risk of litigation is heightened given the lack of prescribed remedies and consequences in addition to the wide spectrum of issues that may come down to “he said, she said”. In the recent decision of Hodder Construction (1993) Ltd. v Topolnisky, 2021 BCSC 666 (CanLII) (“Hodder”) the Court was called upon to adjudicate a myriad of issues that can arise in both a collapsing construction project and where there is no formal contract at the heart of the dispute.
In Hodder, the plaintiff contractor had been retained to act as a general contractor for a specially designed steel-frame home for the defendant property owner. The project was commenced without a written agreement and ran into several issues including the head architect eventually leaving the project and a stop work order being issued as a result. Disputes arose between the contractor and owner because of the owner refusing to pay the contractor’s invoices and questioning the billing practices of the contractor.
The total amount of the invoices issued was $854,400 of which the owner paid $495,000. The contractor stopped working when payment was being refused and liened the property. The owner retained another general contractor to finish the work and paid it another $635,000 including $131,094 alleged to be work within the scope of the work the plaintiff contractor invoiced. The owner also alleged the contractor’s invoicing was in violation of an agreed-upon maximum cost of $850,000. The contractor sued for its unpaid invoices based on both contract and quantum meruit (the concept of being paid the fair value of your work) and the owner countersued for the amount she said she wrongfully paid the contractor, breach of contract and negligent representation.
In analyzing whether the parties reached a binding contract, the court held that such a finding was dependent on finding there had been a consensus ad item or meeting of the minds, which, in turn, required an analysis of the expressions of intent of the parties.
The court did not have difficulty finding that the parties had agreed for the plaintiff to act as a general contractor for the construction of a home, but that was not enough to find that a contract had been formed. The court found that “fixed price” documents exchanged were not signed and were produced for the purposes of obtaining construction financing. The full scope of the contract’s work and the cost consequences of work being removed from that scope were not spelled out. There was no clear completion date agreed upon. There was no clear agreement on the amount the contractor would be paid for its work once complete.
Ultimately, the court found that there was no enforceable contract between the parties. The lack of any clear agreement on the contract price or remuneration caused no contract to be formed.
In the absence of a binding contract, the court then went on to analyze how the contractor’s claims for payment and the owner’s counterclaims for overpayment and costs to complete the work should be adjudicated.
The court held firstly that it is possible that estimates the contractor gave could be given contractual effect, setting a limit beyond which its charges could not go. The court further detailed that this legal concept is tempered by the uncertainty inherent in construction work and that even an estimate found to have binding legal effect must treated with leeway.
While the court found that there was no contract and, as such, there could be no contractual effect for any representations the contractor made to the owner, there existed a quasi-contractual relationship between the parties supporting the notion that a reasonably informed estimate provided by an experienced builder and relied upon to an owner’s detriment could have legal effect. The court went on to cite the law that such effect made be found where:
- a special relationship between the parties existed;
- a false, inaccurate, or misleading representation was given by one party to the other;
- there was negligence in making the representation,
- there was reasonable reliance on the representation; and
- detriment occurred as a result of the reliance
The court found that a quasi-contractual relationship existed satisfying the first element. The court rejected the factual underpinnings of arguments about whether representations made were false because the court found that there was conflicting and inconsistent evidence about a construction budget and found that the contractor never agreed to a $850,000 costs cap as alleged by the owner. As the owner failed to meet the second element of the test for negligent misrepresentation, the court concluded its analysis and rejected arguments about misrepresentation.
In determining what the contractor might be owed, the court first discussed that there are a variety of contractual, quasi-contractual and equitable means of determining the amount a contractor may claim which are fact specific in application. At paras. 178 and 179, the court held as follows:
In the case of contractual quantum meruit, the underlying premise is that the parties reached an agreement that included an implied term for reasonable remuneration, without specifying the amount or mechanism for determining remuneration. In such cases, the appropriate monetary award is determined by reference to the “cost of the services, rather than the benefit to their recipient…
In the case of restitutionary quantum meruit, the underlying premise is that the party who provided the services is entitled to be compensated in connection with the opposing party’s unjust enrichment. As an equitable remedy, restitutionary quantum meruit is flexible. Over time, courts have come to assess quantum meruit awards “in various ways, including the cost to the claimant of providing the service, the market value of the benefit, or even the value placed on the benefit by the recipient”:… Thus, the measure of damages has been described variously as “the amount the [claimant] deserves”, “what the job is worth”, “the value of the benefit obtained by the defendant”, “the reasonable market value of the services”, or the “value of the services rendered to the defendant”…
The court made several adjustments to the contractor’s claims including:
- rejecting the contractor’s claims for rental of its own equipment;
- the court noted this might be appropriate in cost-plus arrangements, but was not for this sort of quantum meruit claim;
- the court reduced labour costs;
- the amounts claimed were increased over the costs incurred and, while the court accepted that there was some justifiable overhead expenses that could be added onto the amounts actually paid, not all such amounts were claimable on a quantum meruit claim;
- the court rejected markup on materials;
- again, since a cost-plus arrangement was not agreed to, the court would allowed payment for the contractor’s costs but not an amount on top of that; and
- the court adjusted a 5% management fee it allowed to harmonize with other adjustments it made to amounts claimed.
In total, the court reduced the amounts claimed as outstanding by the contractor from $359,862.09 to $199,879.16. In that same vein, the contractor was entitled to a builders’ lien for the same amount and the remedies that flowed from same.
The court rejected the owner’s claims for defects and deficiencies finding that such claims were for amounts to complete the work started by the contractor and were not actually defects and deficiencies.
Hodder is a cautionary tale for both contractors and owners.
As the court in Hodder pointed out many times, in a cost-plus arrangement, the contractor might have claimed significant portions of the over $150,000 in claims the court disallowed because it was granting a judgment based on quantum meruit. The contractor may have also been able to realize anticipated profit more easily on incomplete work had the parties had reached a properly detailed contract that would have governed their dealings.
Similarly, the owner might have succeeded in her arguments that construction costs would be capped and may have successfully advanced costs for completing work or for amounts which exceeded the construction cap if she had properly secured a detailed contractual agreement containing such budgetary constraints.
Both parties may have saved significant legal expense by entering a detailed contract even if elements of that contract would have come into dispute anyways. The parties may have significantly reduced the amount of testimony that was required to be given, the need to argue about the meaning and import of tangentially related documents and communications and even number of issues that could reasonably be disputed.
Some related articles I have recently written on similar subject as this one include:
- Contract Law Largely Explored in One Case;
- Keeping Construction Costs Under Control: Costs-Plus vs. Guaranteed Maximum Price;
- Construction Estimates and Failure to Agree on Contract Pricing; and
- Negligent Construction – Who to Sue and What to Sue For.
Jeremy Burgess is a litigation associate at Pushor Mitchell with broad experience in litigation including construction and contractual disptues. 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.