In the rush to get a construction project underway, significant pressure may exist to close deals quickly. Sometimes, it might even appear necessary to sign a contract before all the terms have been finalized in a detailed written agreement. Although this practice may increase expediency in the short-term, a recent decision of the Alberta Court of Appeal highlights the potential danger in signing a contract before all the terms have been clearly established.
Ko v Hillview Homes Ltd. involved an appeal by a registered home builder (the “Builder”) against a lower court judgment obtained by a home buyer (the “Purchaser”). In this case, the Purchaser retained the Builder to construct a house in accordance with one of the Builder’s standard construction plans. An addendum was attached to the construction contract (the “Contract”) which stated that the house was to contain an additional 1666 square feet not reflected in the standard plan, costed out at $80.00 per square foot. However, the addendum failed to indicate anything further about how the additional square footage was to be used, or which part of the standard plan it was to be added to. A dispute then arose as to whether the Builder had agreed to include the additional square footage in the construction of the new home, and if so whether the terms contained in the addendum were sufficiently certain to bind the parties.
- Was the Contract void because it failed to show how the additional square footage was to be added to the existing standard plan?
The trial judge held that the Contract entered into between the Purchaser and the Builder was valid and binding. The Builder was ordered to pay the Purchaser damages for increased construction costs. On appeal, the decision of the trial judge was overturned. The Alberta Court of Appeal found that the term addressing the additional square footage failed to specify how this additional construction was to take place, and as a result the Contract was void for uncertainty. In its decision, the court provided some useful guidance on how Canadian courts will analyze contracts containing uncertain terms.
The court clarified that far from being a mere “technical defence” the requirement that contractual terms be certain was “an integral part of the very heart of [the law of] contract.” The court specifically concentrated on the importance of drafting agreements that provide certainty with respect to what is being bargained for. Here, the absence of contractual certainty about how the additional square footage was to be built rendered the contract a mere “agreement to agree,” which is unenforceable under Canadian law. Although the court acknowledged the commercial reality that construction companies may commonly modify existing plans to build custom homes for their customers, it noted that care should be taken to ensure that specific details are provided setting out how any modifications to the existing building plans will be done.
In its decision, the court also criticized a common mischaracterization of the law surrounding certainty of contractual terms which suggests that a contract is valid so long as the contract provides sufficient certainty about the parties to the contract, the property in question and the price to be paid. While recognizing that this formulation provides a workable rule in most cases, the court stated that a contract can be void for uncertainty even where the parties, property and price are clearly identified in the written agreement. For example, in some cases, a contract may be void for failing to clearly establish how the contract is to be performed or paid for.
Exercise caution when entering into agreements that do not clearly outline key terms or scopes of work.
An agreement that leaves an important term or scope of work undefined for future agreement may not be legally enforceable as an “agreement to agree”.
- If it is necessary to conclude a deal before all the contractual terms have been set out in detail, consider including a clause authorizing the appointment of an arbitrator or valuator should any future discrepancy arise.
This article was written by Ian C. Moes, a lawyer, and Andrew Delmonico, an articled student, 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 us at 604-682-8868