Who Breached the Contract?

When disputes over alleged deficiencies arise during construction, the paying party will quite often refuse to pay any further money until the deficiencies are fixed.  When this occurs the contractor (or subcontractor) will usually refuse to do any further work until they are paid.  The result can be like trying to solve a murder mystery game of “Who did it?” Only, instead of murder, it is “Who breached the contract?”  A recent decision of the British Columbia Supreme Court shows that, as usual, it depends on the terms of the contract and the conduct of the parties.
 
FACTS
In Western Homes & Management Ltd. v. Yusuf, the Contractor was hired to build a new home for the Owners for a fixed price of $176,000 in 2003.  The terms of payment in the contract required the Owners to pay various amounts as construction progressed to certain stages.  In particular the contract provided that the Owners would make a third payment of $55,000 “after the drywall, (as soon as the bank appraises the property and releases the money to the owner).”

The Owners made the first two payments required under the contract but refused to make the third payment, despite having the work appraised and the money released to them.  They said the drywall stage was not complete and, in any event, the Contractor was not entitled to this payment until it corrected deficiencies that the Owners had previously identified and that they said the Contractor agreed would be corrected before the drywall stage payment was to be made.

The Contractor disagreed and sued the Owners for breach of contract claiming payment of the $55,000 plus loss of profit of 15% included in the contract price.

The Owners counter-sued the Contractor in response saying that it was actually the Contractor who breached the contract by invoicing for the third payment when the drywall was incomplete, failing to fix the deficiencies, and refusing to continue with the construction of the house.

ISSUE

Who breached the contract?

DECISION

In order to answer this question, the Court had to interpret the terms of the contract and assess the parties conduct. Since the bank had in fact appraised the property and released the money to the Owners, the key questions were whether the drywall was complete and whether there was any side agreement that modified the terms of payment.

To deal with the drywall question, the Contractor hired an expert witness who defined conclusion of the drywall stage as when the boards are up, mudded, taped, and sanded. The Contractor testified that the drywall was complete except for the textured ceiling and touch ups, which would be completed later. The Owners, however, testified that significant amounts of drywall remained, including holes in the drywall, it had not been boarded or mudded, sanding was incomplete and the drywall had not been primed or textured or cleaned up ready for painting.

In the end, the Court did not accept the Owners’ evidence. Rather, the Court concluded that the terms of payment in the contract were clear and that they were “triggered by the bank appraisal and release of the money to the owner”. The contract did not allow, or even contemplate, that the Owners would be the arbiters of whether the drywall stage was completed.

With respect to the alleged side agreement the Court had to assess the credibility of the parties and determine which position is consistent with the conditions at that time. In this respect, the Court concluded that it was unlikely that the Contractor would have agreed to add conditions to a clear contractual requirement requiring the third payment.

As a result, the court concluded that it was the Owners who breached the contract. The Contractor was awarded payment of the $55,000 minus $5,000 for deficiencies that arose before the Contractor walked off the job and for which the Contractor was found to be responsible. 

The Contractor was also awarded loss of profit on the work, but interestingly, only up to the point that the Contractor walked off the job and not on the value of the contract overall.  It is arguable whether this is correct in law given that the purpose of damages is to put a party back in the position they would have been in had there been no breach, in which case the Contractor would have made a profit on the job overall.  If appealed, this is likely a point of appeal that would be addressed.Know what the terms of the contract say.

LESSONS FOR CONTRACTORS

  1. Beware of any discussions that may be interpreted as your agreement to vary the terms of payment.  While the Contractor was successful in this case, it is not difficult to see how a different decision can be reached in other situations.
  2. Get legal advice if you do not fully understand the consequences of your refusal to do any further work on a project, as each situation will depend on the terms of the contract and the conduct of the parties.
 
This article was written by Ian Moes, a lawyer who practices in construction law at 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 questions or comments about this case or other construction law matters, please contact us at 604-864-8877.