Sharing the Pain

There can be many side agreements and understandings during the course of construction.  If you do not properly document them, however, they may not be enforceable.

Facts:

Chateau Granville Partnership v. Chateau Granville Inc., et al. involved a dispute between the owners of the Chateau Granville Hotel (“Chateau”) and the construction manager it hired for a renovation project, Kindred Construction. 

Chateau had issues with Kindred Construction’s performance, inefficiencies, and alleged incompetence on the project.  After some discussion, both parties signed and agreed to a Letter Agreement resolving their issues and preserving their original contract, and by which:

  • Chateau promised to pay Kindred Construction money to be used to pay outstanding invoices from trade contractors. 
  • Kindred Construction promised to pay all trades and credit Chateau an amount equal to their management fee to Chateau. 

Kindred Construction alleged that Chateau said in oral discussions prior to signing the Letter Agreement that if they wanted to “share the pain” of losing the management fee, they could pursue trade contractors to offset it.  The dispute ended up in court because Kindred Construction solicited and collected approximately $100,000 from the trades that Kindred Construction said is theirs in order to “share the pain” of both the performance problems and their loss of the management fee.  This was a problem for Chateau, because Kindred Construction was merely Chateau’s agent on the project, did not have any contractual relationship with the trade contractors, and the Letter Agreement did not permit Kindred Construction to collect money from trade contractors. The key distinction being that Kindred Construction was a construction manager and not the general contractor.

Issue:

Was Kindred Construction permitted to keep the $100,000 it collected from trade contractors?

Court Decision:

At trial, the court found that Kindred Construction could not keep the $100,000 it collected from trade contractors. 

In reaching this conclusion, the court looked at whether the Letter Agreement was the entire agreement of the parties.  Kindred Construction argued that there was an oral agreement that allowed them to “share the pain”, even though that term was taken out of an earlier version of the Letter Agreement.  The court concluded, however, that the Letter Agreement was the complete agreement between the parties.

The court said:

Objectively, looking at the words the parties used in the [Letter Agreement], they intended that Trade Contractors were to be paid in full, and not have to “share the pain.”  The “pain” was Kindred’s alone to bear….I find, therefore, that the terms of the parties’ agreement made in July 2009 are contained in the [Letter Agreement].  I reject Kindred’s assertions of an express oral term, or, alternatively, a collateral agreement, and I also reject Kindred’s argument that a term permitting it to “share the pain” should be implied.

As a result, the court ordered that the $100,000 that Kindred Construction received from trade contractors was not authorized.  Under the construction management contract, Kindred Construction was Chateau’s agent.  Therefore, Kindred Construction did not have Chateau’s consent, as its agent, to collect and keep money from trade contractors.  The court said:

…the terms of the [Letter Agreement] required that the Trade Contractors be paid in full.  “Sharing the pain” meant that, in fact, they were not.  I find, therefore, that Kindred is liable to account to the plaintiffs for the amount it collected in breach of its duties as agent, and without the plaintiffs’ consent.

Lessons Learned:

  1. You may not be able to rely on oral agreements or understandings if later behavior or documentation conflicts with them.
  2. Ensure that all key terms in an agreement are written down and agreed to.  Any final agreement should state that its terms supersede any oral agreements.

 

 

This article was written by Ian C. Moes and Jonathan B. Maryniuk, lawyers with the law firm of Kuhn LLP. 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 legal matters, please contact Ian at 604-682-8868.