When is a Deal, a Deal?

When negotiating a building contract, it can sometimes be difficult to identify the exact moment when a deal has been reached.   Sometimes, a person may feel like a "handshake deal" is not a deal at all, but simply a friendly conversation.  In Rivera v Metropolitan Construction Ltd., the Court provided some guidance for determining when a legally enforceable agreement has been reached.  

FACTS

In 2007, a husband and wife (the "Couple") approached a local contractor (the "Contractor") to discuss building a home in Vancouver (the "Project"). The Couple informed the Contractor that they intended to cover the expense of the Project by taking out a $350,000 mortgage.

On several occasions over the next four months, the Contractor spent time at the Couple's house discussing the Project, drove the Couple around Vancouver to look at properties, and put the Couple in contact with mortgage brokers. However, the Couple learned that instead of being approved for a $350,000 mortgage, they could only obtain $200,000 of mortgage financing.

The Contractor nevertheless asked for $20,000 to begin surveying building lots. The Couple told the Contractor that they saw no point in proceeding with a survey until they had appropriate financing. The Contractor told the Couple that even if they were not approved for a larger mortgage, they could keep the survey results if they wanted to build in the future. Since the Couple could not afford a $20,000 payment at that time, they agreed to give the Contractor $10,000 to start surveying.  The cheque noted the funds were a "deposit for house construction".

Unfortunately, immediately after the Couple deposited the $10,000 into the Contractor's bank account, the husband learned that he was going to be laid off.  But approximately $1,600 was already paid to a surveyor.  The Contractor claimed that the funds were a deposit for the home construction and refused to return the Couple's $10,000. 

ISSUES

  1. Did the Couple and the Contractor enter into a legally binding agreement?
  2. Could the Contractor keep the $10,000? Or did it have to be returned to the Couple when the Project never materialized?

 

COURT DECISION

The Court determined that a mutual intention to create a legally enforceable agreement never existed between the Contractor and the Couple. The parties' lack of agreement on certain essential terms, such as the price and design of the home, was evidence that a binding house construction contract had never been entered into.

The Court said the Contractor had to give back the $10,000.   The Court said that a deposit operates as an earnest or guarantee that the contract will be performed; a down payment is intended to cover work and materials supplied. The Court said that in this case, the $10,000 was a down payment, not a deposit, and that it had to be returned to the Couple when the Project did not go forward. The Court reached this conclusion by treating the lack of evidence showing that the Couple understood the $10,000 to be a deposit as proof that the money was actually a down payment.  In other words, if the Contractor wanted the money to be treated as a deposit, it was his responsibility to clearly communicate this intention to the Couple. 

The bulk of the Contractor's argument that a building contract existed between himself and the Couple was rejected.  The Court did agree that the Contractor should receive some compensation for his unpaid labour.  However, because the Contractor could produce no time records or other evidence indicating how long he had actually spent helping the Couple, the Court limited his award to $1,500.  The Court also gave the Contractor compensation for the amount paid to the surveyor.

LESSONS LEARNED

1)      If you are unable to settle certain key terms in a construction contract, such as a home's design or cost, early on in negotiations, you risk that the Court will later refuse to recognize your agreement even if work has already begun.

2)      If you are going to take money on deposit, it is prudent to obtain a written statement by other contracting parties showing that they understand the purpose for which the money is being paid.

3)      If you provide services for helping a client prepare early on in the construction process, make sure to save time records showing the extent of your efforts in case you later need to seek compensation if the deal falls apart.

This article was written by Jonathan Maryniuk, a lawyer, and Andrew Delmonico, an articled student, who practice in construction law with the law firm of 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 604-864-8877.