Walk On: The Inadvertent Effect of a Mutual Termination
It is not uncommon to encounter a dispute in a cost-plus project over the escalating cost of work. When a dispute arises, how a contractor handles the termination of the construction contract (be it written or verbal) can be vital in determining what types of damages it can successfully claim.
In the recent case of Highridge Homes Ltd. v de Boer, 2021 BCSC 1112, the court examined the formation, performance and termination of a contract for the construction of a new home and, specifically, the effect a mutual termination had on a contractor’s claim for loss of profit.
In this case, two homeowners (together, the “Owners”) retained Highridge Homes Ltd. (“Highridge”) to build a custom home at the Predator Ridge Golf Course development in Vernon, British Columbia. The parties utilized a written cost-plus construction contract, varied slightly from Highridge’s standard form contract (the “Agreement”).
Shortly after entering into the Agreement, Highridge commenced work and began invoicing the Owners. However, a dispute quickly arose over the initial excavation which cost the Owners more than expected.
A meeting was held to discuss costs and invoicing. To quote Mr. Justice Wilson, “[w]ords were exchanged, voices were raised, tempers flared, doors were slammed, and the relationship ended.”
However brief and heated that meeting was, it culminated in discussions around an “exit strategy” to the contractual relationship. This was confirmed by a subsequent email and letter from the Owner’s lawyer.
Highridge later commenced an action against the Owners seeking amounts in its unpaid invoices, plus damages for lost profit (i.e. management fees it would have made over the remaining duration of the Agreement) which Highridge says it would have earned but for the Owner’s wrongful termination of the Agreement.
The Owners counterclaimed against Highridge, claiming that Highridge terminated the Agreement and, as a result, the Owners are entitled to additional expenses they had to pay their replacement contractor to complete the home.
The court held that the parties agreed to a mutual termination. While Highridge was entitled to claim some of its costs in its unpaid invoices, Highridge was not able to claim for lost profit as it agreed to terminate the relationship. Similarly, the Owners were not able to claim for additional expenses pertaining to their replacement contractor as they too agreed to terminate the relationship with Highridge.
In assessing Highridge’s claim for lost profit and the Owner’s claim for additional expenses, the court had to canvass both Highridge’s allegation and the Owner’s allegation that the other breached the Agreement. In doing so, the court examined in detail the evidence on the meeting, particularly with reference to discussions around an “exit strategy”.
Because the parties agreed to end the Agreement, Highridge was neither required nor permitted to undertake any further work on behalf of the Owners. For their part, the Owners were free to complete their home as they saw fit.
Highridge was not able to claim for loss of profit arising from the remainder of the work because it was a party to the decision to bring the arrangement to an end. Similarly, the Owners were not able to pass on the extra expenses they incurred as a result of having to hire a new builder.
- A contractor’s conduct in handling the termination of a contractual relationship can be critical in its ability to claim for damages such as loss of profit.
- It is helpful to have a detailed construction contract on how costs of the work will be monitored and, in the event of a dispute arises, how the parties might terminate the relationship.
- When a dispute arises, It is prudent to contact a lawyer as early as possible to help understand your legal rights and obligations, assist in navigating communications and help protect your access to potential legal remedies.
This article was written by Matthew T. Potomak and Liam M. Robertson, who are lawyers that 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).