Double Trouble: Defining the Relationship Before the Bill Doubles
When urgent construction work is required, it is all too easy to hastily move forward without properly defining the contractual relationship and terms of payment. The recent case of All Out Contracting Ltd. v. Gourlay, 2018 BCSC 481 addresses a common scenario where work proceeds under an ambiguous estimate.
In this case, the defendant homeowners owned a house in Nanaimo, British Columbia that was adjacent to and overlooked a creek. At the back of their house was a large retaining wall that supported the bank down to the creek.
In 2015, the owners noticed the retaining wall was bulging out revealing cavities under the rear patio slab. The owners quickly retained the plaintiff as the contractor to teardown and rebuild the retaining wall.
After reviewing the site with various engineers and City representatives, the contractor provided the owners with a construction estimate, which both parties signed (the “Estimate”).
The Estimate included the scope of work and referred to the contract price as a “set price cost plus” basis. The “set contract rate for the Work [was] $80,000 to $100,000” and failed to clearly articulate the basis for calculating the cost-plus portion. The Estimate stated further that the price was estimated and dependent on engineers and a biologist.
The contractor commenced the work, but soon encountered unforeseen complications. The fill behind the wall was unstable and part of the house was balanced on the fill. This fill needed to be removed and replaced as there was a danger that the house would settle further down the embankment without additional structural support.
The owner’s homeowner insurance was in jeopardy and their mortgage was up for renewal, so they had the contractor continue with the repairs without clarifying the ongoing price.
After the work was completed, the contractor billed the owners for $206,505.80. The owners had already paid $140,000 and refused to pay the rest. The owners took the position that the initial estimate of $80,000 to $100,000 was binding and that the $20,000 gap in the estimate was the amount contemplated to account for unforeseen circumstances.
The BC Supreme Court, relying on principles of equity, awarded only $22,194.50 to the contractor, in addition to what the owners had already paid. This reduction to the contractor’s fee was based largely on significant reduced labour rates. Had the contractor clearly set out its rates at the beginning, it would have been entitled to its 15% profit margin. Instead, the court ascribed a contractor’s fee of 7%.
While the contractor took on serious risk that its estimate would be found binding, the court did find that the construction estimate was just an estimate that was subject to the express qualifications of the ongoing review of the engineers and biologist.
The court opined that all this confusion could have been avoided if the contractor had spelled out its costs and profit margin clearly from the beginning.
- Define the relationship early and in writing. The initial agreement must include clear terms of price if the contractor wants to recover their bill. If a contractor expects to recover its profit margin charged in a cost-plus agreement, the contractor must clearly spell out a fixed percentage of profit that will be added to costs, in advance of the work.
- Whether an estimate is binding or is “just an estimate” will depend on the facts. Qualifying the estimate by adding clearly defined and narrow contingencies may assist in preventing an estimate from being construed as a binding maximum price.
This article was written by Matthew T. Potomak, lawyer, and Jeremy S. Koch, 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 (Abbotsford) or 604-684-8668 (Vancouver).