Killing a Contract

The goal in signing a contract is generally to see it through to completion. However, contracts often contemplate a method for terminating the contract in certain circumstances. Recently, the court clarified the law surrounding this issue.

Facts

In 2001, an owner hired a general contractor (the "Contractor") to complete a home building project in West Vancouver. The owner was represented by his son (the "Agent") throughout.

The Contractor and the Agent entered into a Stipulated Price Contract (SPC) where they agreed that construction would start by August 2001 and be completed by June 2002. The projected completion date turned out to be "wildly optimistic", and the Contractor was still working on the premises several years after construction was supposed to be finished.

In 2006, the Contractor sent a statement to the Agent for unpaid accounts totaling over $150,000. The Agent refused to pay the outstanding invoices and, in return, the Contractor stopped active construction on the project. After several unsuccessful attempts to resolve the dispute in person, negotiations continued indirectly through the project architect (the "Architect").

During the course of these indirect communications, the Architect faxed a brief note to the Contractor implying the Contractor's willingness to terminate the agreement and allow a third party to complete the project. The Contractor then informed the Architect that he did not consider the contract terminated and that construction should not continue without him, except in accordance with the written terms of the agreement. The Architect responded by telling the Contractor that the project had been abandoned and that he should terminate his contract accordingly. The Contractor disagreed that the project had at any time been abandoned, and referred to his company's continued maintenance of the property as evidence of this fact.  

The Contractor also told the Architect that his company would complete the removal of a concrete wall on the owner's property that had previously been identified as a safety issue. If the invoices were still left unpaid after this was done, then the Contractor would consider the agreement officially terminated. When the Contractor received no payment for his outstanding accounts, he filed a builders lien with the Land Titles Office and sued the owner. The owner applied to have the lien cancelled under Builders Lien Act.

Issues

  1. Was the contract terminated during the course of negotiations?
  2. If not, was the agreement abandoned when the Contractor stopped working regularly on the project?

 

Court Decision

The Builders Lien Act stipulates that a lien may be filed no later than 45 days after a contract has been completed, abandoned or terminated. In this case, if the contract was terminated during the course of negotiations, or if the Contractor abandoned the contract during the time when there was no active construction, then the lien would not have been filed in time and would be removed.

Was the contract terminated?

The parties identified three possible dates for the termination of the contract. The owner argued that the contract had been terminated either orally during the course of ongoing negotiations, or when the Architect had instructed the Contractor that a third party had been hired to finish the project. The Contractor, on the other hand, suggested that the contract remained in effect until he exercised his right of termination in accordance with the written contract.

In answering this question, the court had to decide whether the agreement could be terminated orally or by fax, even where the contract required a more formal procedure. Although the court speculated that it might be possible for a contract to be terminated orally where no formal method had been identified, this would be insufficient if a procedure was already contemplated within the written contract. In this case, the contractual terms stated that if the owner found the Contractor in default of his obligations, he had to instruct him in writing and give the Contractor five working days to remedy the deficiencies. It was only in the event that the Contractor failed to fix the deficiencies within this timeline that the owner's right to terminate arose. Because the owner and his agent did not follow the termination procedure set out in the contract, the agreement remained in effect until the Contractor officially ended it.

Was the project abandoned?

The second issue that the court had to decide was whether the Contractor had effectively abandoned the contract at any time when there was no active construction. In this regard, the Builders Lien Act states that a contract is "deemed" to be abandoned on the expiry of a 30-day period during which no work has been done in connection with the project.

The owner argued that the Contractor abandoned the project in the spring of 2007 when he first stopped working. The Contractor argued that the project was never abandoned as he had continued to maintain the property. In support of this point, the Contractor provided evidence that he had continued to remove material from the construction site, paid invoices to BC Hydro and the fence rental company, and periodically inspected the site. The court held that the maintenance performed by the Contractor, although minimal, was sufficient to constitute "work" for the purposes of the Act. Even though construction had officially ceased, the Contractor was found to have continued "working" on the project; the contract had not been abandoned and the builders lien remained on file.

Lessons Learned

  1. If you intend to terminate a construction contract at any time prior to its completion, ensure that it is done in accordance with the contract's written requirements.
  2. If negotiations break down during the course of the work, consider the implications that continued maintenance of the site will have on determining whether the contract has been abandoned.

 

This article was written by Ian Moes, a lawyer, and Andrew Delmonico, an articling student, both with the law firm of Kuhn & Company. It is only intended as a guide and it is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact him at 604-682-8868.