With friends like these, who needs enemies? The cost of doing business with friends

When undertaking a significant construction project, it often helps to know someone in the industry. However, a recent decision of the BC Supreme Court highlights the problems that can arise when doing business with friends or family.

Facts

The recent BC Supreme Court decision in Malhotra v. Waterfront Homes Ltd. concerned two families who had previously considered themselves the best of friends. The Manhas family, through its company Waterfront Homes Ltd., agreed to build a home for the Malhotra family (the “Project”). Although both Mr. Malhotra and Mr. Manhas were experienced businessmen, they were lulled into complacency as a result of their longtime friendship. Neither thought it necessary to formalize the building arrangements through a written contract or maintain proper financial records.

The Malhotras were subsequently dissatisfied with the workmanship on the Project. The relationship between the parties quickly deteriorated, liens were filed, and small claims actions were commenced. The Malhotras sought damages for negligent construction, in addition to damages for harassment, assault and intimidation. Waterfront counterclaimed for payments alleged to be owing for work performed.

Adding to the complications arising from the informality of the parties’ dealings was their decision to “fiddle” with taxes to minimize the HST. Cash payments went unrecorded, resulting in an absence of proper documentation in the litigation. Ultimately, the Court was required to sort through the parties’ biased and self-serving testimony in order to determine what really happened.

The Decision

The Court dismissed the parties’ claims in negligence, intimidation, harassment, and assault.

A primary difficulty faced by the Court in this case was that construction was paid for using various means, including personal credit cards, company cheques, and cash. This made it very difficult to determine whether individual payments related to construction of the Malhotra’s home, or if the payments were used for other purposes. While the Court did find that the Malhotras had given Mr. Manhas $50,000.00 in cash for which he never accounted, the lack of proper documentation created an obstacle to greater recovery.

Lessons Learned

  • Maintain proper records even when doing business with friends. If the project goes south, failure to maintain this documentation may result in losing not only your friends, but also your court case.
  • Maneuvers to “fiddle” with taxes are not only illegal, but may prove more costly than the taxes would have been in the first case.

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.