Getting Paid and Fixing Deficiencies

It can be very frustrating when a homeowner refuses to make the final payment because of seemingly inconsequential “deficiencies”. However, the BC Supreme Court made it clear in Constructum Developments Inc. v. Hogaboam, 2015 BCSC 1490, that a homeowner may be entitled to correction of all deficiencies before they are obligated to make the final payment. In fact, a contractor’s insistence on receiving final payment before fixing final deficiencies may actually result in a repudiation of the parties’ agreement.

Facts:

In this case, the Contractor entered into a General Contract Agreement with several Homeowners for the construction of a new home in Westbank (the “Project”). As the Project neared completion, a dispute arose between the Contractor and the Homeowners over the correction of a number of deficiencies, including: the omission of a walk-in pantry in the kitchen, incorrect exterior colour, and doors being hung improperly or installed completely defectively.

Eventually, a stalemate developed between the Contractor and the Homeowners. The Contractor refused to remedy any of the deficiencies until he received payment for his final progress draw. The Homeowners refused to sign the Contractor’s certificate of completion or make any further payments until the deficiencies were corrected. Ultimately, the Homeowners changed the locks and refused to let any tradespeople associated with the Contractor on site. Afterwards, the Homeowners remedied the deficiencies at their own expense. The Contractor sued the Homeowners for recovery of the amount of his final progress draw plus extras. The Homeowners counterclaimed for their costs in rectifying the deficiencies.

The Decision:

A significant issue the Court had to consider was who was responsible for repudiating the Contract; did the Contractor breach the contract by failing to rectify deficiencies until he was paid, or did Homeowners breach the contract for refusing to pay until the deficiencies were corrected? On this issue, the Court sided with the Homeowners, finding that the Contractor’s refusal to complete deficiency work until he was fully paid amounted to a fundamental breach of the Contract. In this case, the Homeowners were found to be within their rights, based on the wording of the contract, not to release the final payment until all deficiencies were corrected.

Lessons Learned

  • You may be required under the terms of your contract to correct all deficiencies before demanding your final payment.
  • A demand that you be paid in full before deficiencies are corrected may actually put you in fundamental breach of your building contract.
  • Consider including a clause in your building contract that clearly spells out what constitutes a default on the part of the contractor and the homeowner, and provides a clear mechanism for dealing with these defaults should they arise.

This article was written by Ian Moes and Jay Spiro, lawyers who practice construction law with Kuhn LLP. This article is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have any questions or comments about this case or other construction law matters, please contact us at 604-682-8868.