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Uncertain terms: Absence of a formal agreement on construction projects

Parties who have partnered up for construction projects, but have not drafted a formal contract may face uncertainties about their legal rights when potential issues arise. Although binding contractual relationships may be found in law in the absence of a formal contract, recent case law from the British Columbia Supreme Court and the Alberta provincial court came to opposite conclusions about the conditions under which this is possible.

In Hodder Construction (1993) Ltd. v Topolnisky, 2021 BCSC 666, the plaintiff contractor brought a claim against the defendant homeowner in relation to the construction of a new home. A year into the construction, issues began to arise on the project. Costs began to exceed earlier estimates and the homeowner fell behind on payments. A few months later, the general contractor withdrew from the project, registered a builders’ lien, and sued the defendant for $359,400 in unpaid invoices. The homeowner counterclaimed for the contractor’s alleged failure to complete the project and for deficiencies. The parties never entered into a formal written contract. Although there were extensive text messages, letters, email exchanges and in-person communication, the court held that there was no binding contract between the parties.

The court held that an agreement between the parties to work together was not sufficient to establish an enforceable construction contract. The court concluded that an enforceable construction contract generally requires a meeting of the minds as to the nature of the construction and the timeline for completion and the price. While the court may look to external circumstances to ascertain the objective intentions of the parties, the surrounding circumstances cannot result in effectively creating a new contract that the parties never intended to create.

In this case, the parties did not agree on a timeline, structure of fees, or a contract price. Instead, the court’s sole finding as to an agreement was with respect to the parties agreeing that the plaintiff would act as the general contractor. The court opined that the issuance and payment of invoices, in absence of a formal contract, could show a meeting of the minds on essential terms if the invoice was clear enough. However, this is a highly factual analysis, and in this case, it was dependent upon the detail in the invoices. In another case considered by the court, Greenhill Properties (1977) Ltd. v Sandcastle Recreation Centre Ltd., a binding contract was found where there was no written contract, but the invoice included an itemized list of costs, an eight per cent markup and a three per cent overhead fee.

In this case, the court ultimately dismissed the contractor’s breach of contract claim since it found that there was no contract. However, to ensure the contractor was not completely denied of compensation for work and materials on the project, the court applied the legal principle of restitutionary quantum meruit, and awarded the contractor $199,879.16. The homeowner, on the other hand, counterclaimed for $131,094 on the basis that the contractor negligently represented that it would finish its scope for a certain amount of money. Based on a detailed analysis of the facts of the case, the court determined that the parties never agreed to a certainty of terms as to price. The court held that in the absence of a binding contract, the notion of a quasi-contractual relationship may support a claim in negligent representation and that a reasonably informed estimate from a builder holding themselves out to have sufficient knowledge and skill can form the basis of a contractual term about price. However, when an estimate is given without much discussion, much less agreement on the nature and quality of finishing, it will not suffice. As such, the court dismissed the homeowner’s counterclaim.

By contrast, in Jomha v Dergousoff, 2021 ABPC 268, the Alberta provincial court found that a contract did, in fact, exist between the parties despite the absence of a formal agreement. In that case, the plaintiff, Jomha, was a homeowner who hired the defendant to complete a rebuild of his basement. Issues began to arise when the project became delayed and the costs increased. The defendant contractor walked off the job site after the plaintiff refused to pay $19,000. The plaintiff claimed that the defendant was a general contractor for the property, the agreed price was a lump sum of $50,000 and that the defendant would cover all labour and materials associated with the internal renovation. The defendant argued that the terms of their agreement were that he would try to complete the project for $50,000, but that the plaintiff would cover major materials such as cabinets, flooring, and bills submitted by the trades on site. The defendant counterclaimed for the unpaid costs of $19,000.

The court found that there was a contract. However, it is unclear on what basis it made this determination. The court appears to admit that the parties were “far apart as to the terms of the contract” and that it was still an “evolving or changing contractual relationship.” In essence, the court appears to acknowledge that there was no meeting of the minds between the parties and acknowledged the issue of unfairness is not sufficient to declare a contract invalid, but nevertheless seemed receptive to the idea of finding a valid contract because the unwritten terms were blatantly unfair to the defendant. In contrast with the Hodder case, the court in Jomha determined that an enforceable contract existed, despite the absence of a meeting of minds pertaining to certain terms of the contract. Ultimately, the court awarded the contractor its claim for $19,000, without clearly deciding on the key essential terms mentioned in Hodder, and it found that the contractor’s obligations under the contract were to provide competent renovation services, which he did, and the plaintiff was to provide timely payment on his account, which he did not.

Key takeaways

In light of the foregoing cases, it is best practice for parties starting construction projects together to abide by the principles outlined in Hodder, a case that relies on well-established legal principles. In particular, parties to a construction contract should ensure the key terms of their contract are set out in a formal written agreement. Ultimately, whether the parties agree to a verbal contract or a written contract, the parties need to ensure certainty of terms. A written agreement that contains clear terms with respect to all of the factors that are subject to the contract (timeline for the project, price, payment structure, etc.) is preferred and will avoid disputes like these two examples.

If you have any questions related to this article or any other construction related issues, please reach out to one of our construction lawyers.

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