Construction Contracts & Why You Should Have One

Construction Contracts & Why You Should Have One

May 4, 2023

An ounce of prevention is worth a pound of cure – particularly for construction. Whether it is a new build or a renovation, it is costly work prone to surprises. A properly drafted contract will benefit both the owner and the contractor by providing clarity and certainty. The contract should:

  • Clearly define the scope of work and corresponding price;
  • Detail the timeline for completion and payments; and
  • Provide a mechanism for addressing unexpected changes.

Without a proper contract, the parties risk having conflicting expectations leading to serious disagreements. This puts the project in peril and leaves everyone involved unhappy. The consequences of an ill-defined contract came to bear recently in the case of Atlantic Canada Log Homes Inc. v. Buergi. The key take aways are:

  • The contractor is primarily responsible for ensuring a proper contract is in place:
  • Without a clearly defined and agreed upon price, the owner may not be able to rely on prior estimates and will instead have to pay on a cost-plus basis; and
  • A contractor will only be able to recover costs that are properly evidenced.

In this case, the homeowner, Ms. Buergi, set out to build her dream home. She retained a contractor, Atlantic Canada Log Homes Inc., to construct it.

As is common, everyone was happy to start. Ms. Buergi was eager to build her dream home and the contractor was excited to assist her. In the excitement, they began work without a written contract in place. Instead, the parties exchanged emails discussing the general scope and cost of the construction, and the contractor provided non-binding estimates. There was never sign-off on a final plan or price, let alone an executed contract.

As the project progressed, issues arose and the relationship soured. Ms. Buergi requested a multitude of changes impacting the proposed scope of work; however, the parties failed to discuss the corresponding impact on price and timing. In the end, Ms. Buergi terminated the contractor, and completed the work with another contractor.

After termination, the contractor sought payment for all outstanding work. Ms. Buergi responded by alleging that they had a fixed price contract so that the contractor was not entitled to any further payment.

The Court held that Ms. Buergi could not rely on the price contained in the estimates provided by the contractor. The estimates were expressly non-binding and were given while many of the significant details remained undecided. As such, there was no fixed-price contract and the contractor was entitled to payment for the additional work.

The contractor, however, did not get the full extent of its claim. The Court found that the invoices lacked sufficient detail, and the invoices appeared to contain estimates rather than incurred expenses. As such, the Court only awarded a portion of the amount sought by the Contractor.

The Court could only describe the situation as “haphazard” and stated that it was unfortunate that the construction proceeded with “so much uncertainty, vagueness, and without any formal documentation to set down the terms of the agreement.” While the Court found that Ms. Buergi was not blameless, the Court attributed most of the fault to the contractor. The work was within the contractor’s usual and ordinary business, so it was the contractor’s responsibility to ensure clarity in the project, both in its scope and its costs.

The problems caused by the lack of contract were compounded at trial. The Court stated that “the evidence in this trial left much to be desired, and left much of the details unclear”. The lack of initial clarity not only undermined the construction relationship; it further complicated an already complex Court process.

In the end, the lack of a proper contract hurt both parties. Ms. Buergi lost the fixed-price guarantee that she thought was in place, resulting in increased costs. The contractor lost a portion of its claimed expenses, resulting in decreased revenue. If the parties had taken the time to form a proper contract at the beginning, it could have prevented disagreements along the way by ensuring both parties fully understood their rights and obligations. Instead, they were forced to resort to the slow and complex Court process to get a result that neither party wanted.

Cox & Palmer’s Construction and Commercial Litigation Group are available to assist with any questions regarding the formation or enforcement of construction contracts.

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Cox & Palmer publications are intended to provide information of a general nature only and not legal advice. The information presented is current to the date of publication and may be subject to change following the publication date.