A recent case identified a common problem in construction: doing work for friends. When skilled construction people agree to help out friends they need to remember that there are the same (and even greater) risks involved as when they are working commercially. Forget the basic business practices at your peril.
Mr. P was a builder married to Mrs. P, a designer. They agreed with their long-time friends, Mr. and Mrs. W, to design and build a home for them. When the costs came in at over $345,000 (which the owners paid), the owners sued the builder for the return of $45,000 because they argued the builder “agreed to build the house for a fixed cost of $300,000”. The builder argued that he had quoted $345,000. The owners argued that the builder knew they could not afford more than $300,000, and agreed to reduce the price based on the owners doing some of the work. The builder said that there was no such agreement. He argued that the costs were to be paid by the owners, whatever they turned out to total. The parties had committed some of the agreement to writing, which referred to payment of a “management fee of cost plus 8% (to a maximum of $24,000)”. The owners did do some of the work and some extra work was required. The builder provided periodic status reports on costs, but it was not until the builder’s final invoices came in that the owners realized that they were over the $300,000 they thought was the fixed price. For some unexplained reason the owners paid $345,000 and did not notify the builder that “the house had gone far over what was… the contract price” until months later (even after inviting the builder to a celebratory dinner in the new home). Ultimately, the owners sued the builder.
The Court found that the contract between the parties was partly written, partly oral. But it was neither an open-ended, “cost plus” agreement as the builder alleged, nor a fixed price contract as stated by the owners. The Judge found that the builder had applied for the building permit at a declared value of $300,000 and also registered the home for Homeowner Protection Act purposes at the same value. However, how do you explain the owners’ payment of more than $300,000? They did not pay “under protest” nor did they complain until months after they moved into the house. However, the 8% fee of $24,000 is 8% of $300,000. And the builder knew that the price payable by the owners was not unlimited. But there was no clear evidence of a fixed price being agreed upon. So the Court did what was needed: it implied a term. The Judge said that there was an implied term that the builder “possessed sufficient knowledge and skill so as to be able to accurately estimate the costs of construction” and that he did estimate the costs at $300,000 if the owners did the work they promised and there were no extras. In the end the Court was required to guess at the work done and the extras; concluding that the builder had to pay back $20,000, less a $3,600 unpaid bill owed to the builder. After two days of trial, the owners “won” less than $17,000. Any victory was questionable.
- Don’t do business with friends unless you do it properly;
- Be clear in contracts; don’t take short cuts based on verbal understandings;
- Communicate clearly and directly throughout performance of a contract with a clear “paper trail” to establish your view of the facts;
- Court battles often have no winner.
This article was written by Robert G. Kuhn, a lawyer who practices in construction law at the law firm of Kuhn LLP. It 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.