
Legal Blog
Highhanded
It is done all the time. Still, no one wants to be branded as highhanded in a judge’s reasons for decision. This, however, was exactly the description that an Ontario construction lien Master used in Salit Steel v. Mondiale Development Ltd., a 2009 decision. The case also dealt with a number of recurring issues, which, in themselves, made the case worthwhile for comment.
Contract
The sub (really a general because the steel contractor contracted directly with the owner) supplied rebar for an owner’s two-building condominium development. The ultimate value of the work was approximately $5.75 million so there was a lot of steel involved.
Notwithstanding the substantial contract price, the parties used a relatively simple method of creating a contract: a quotation and a March 2004 letter agreement adding additional terms to the quotation.
The sub provided the owner with a contract price per tonne of steel supplied. The owner requested, “should the mill published price of 15M be less than the price published today, (the sub) will reduce their price accordingly…” That clause did not find its way into the letter agreement. Instead, the clause simply said, “Should the price of steel become lower at the time of shipping, (the sub) shall reduce their price accordingly.”
The contract also stated, “Payment terms are: net 30 days (no holdback on supply)…”
Conduct
From March 2004 to March 2005, the sub billed the owner for the steel it supplied. With each invoice, the sub notified the owner of the mill price, which had not yet fallen, but did fall subsequently. The owner never responded to the mill price information because it felt that the mill price was irrelevant and that the parties would calculate the price reduction at the end of the project. The owner paid the invoices less a 10% holdback. The sub complained because the contract said that there was to be no holdback.
The representatives of the sub and the owner met at a parking lot – it must have been a chance encounter. The sub stated that if the owner continued to hold back the 10%, it would be in breach of contract and would therefore forfeit the ongoing benefit of the price reduction clause. From March 2005 to April 2006, the owner continued to hold back 10% of the billings and the sub provided no further information on mill prices.
In April 2006, the owner deducted from its payments on contract the price reduction that it estimated it should have received from the sub.
The project was substantially completed on June 30, 2006. At that time, the owner retained a $575,000 holdback and $406,000 in monies due on contract.
Terms
Unfortunately, the contract was silent as to the measure to determine whether steel prices had fallen. The sub wanted the mill price measure; the owner wanted a market price measure (i.e. the price that steel suppliers were charging to supply steel).
The Master accepted the mill price measure for four reasons:
1. The market price measure changed continually. It would have been very difficult to calculate and made certainty almost impossible.
2. The contract was ambiguous. Since the owner drafted the contract, it should be interpreted in the sub’s favour.
3. The subsequent conduct of the parties seemed to point to the mill price measure. The sub certainly used it and, until the project’s end, the owner never complained to the sub that it was the wrong measure.
4. The version before the ambiguous price reduction clause used the mill price reduction.
Holdback
The Master had to decide, at least initially, whether the owner had the right to hold back the 10% – even though the contract said that there was no such right. The Construction Lien Act has two important concepts in this regard. First, any agreement stating that the Act does not apply to a person or that its remedies are not available, is void. Second, every payer under a contract under which a lien may arise must retain a 10% holdback.
A previous case had held that a non-holdback clause was void because it contravened the Act. The Master distinguished the old case because it dealt with a situation in which there were subcontractors. The Master decided that, in the Salit case, since the sub’s contract was a material supply contract, no lien could arise. Therefore, the no holdback clause did not contravene the Act.
Unfortunately, what may seem to be only a material supply contract may not be. Had the sub subcontracted some of the steel supply to another steel supplier, a lien could have arisen under its contract with the owner. How would the owner know if the sub subcontracted part of its work?
Effect
The Master held that the parking lot encounter resulted in an oral contract by which the owner agreed that there would no longer be a price reduction clause and the sub agreed that the owner could retain a 10% holdback. How the Master came to this conclusion is a mystery to us. A unilateral statement by one party to a contract to the other party cannot possibly result in an agreement to amend a contract.
Accordingly, since the mill price had not been lowered between the date of the contract and the date of the parking lot amendment and since, after the date of the amendment, there was no longer a price adjustment clause, the owner had underpaid the sub by the $406,000 it had deducted from contract payments.
The owner also owed the sub the holdback monies of $575,000, but those payments were only due August 16, 2006, 45 days after substantial performance.
Interest
The Master awarded interest at the rate of 24% per year because the invoices the sub rendered stated that interest was payable at 2% per month. This is contrary to the established jurisprudence on two bases.
First, a stipulated rate of 2% per month is not 24% per year. Because it can be reinvested every month, 2% per month is a higher interest rate than 24% per year. Since, under the Canada Interest Act, all invoices must set out an annual rate, interest is deemed to be only 5% per year.
Second, how can the sub foist an interest rate on the owner without the owner’s consent? All the legal cases of which we know state that, to be effective, an interest rate must be set out in the contract. The sub cannot simply pull a rate out of the air and insert it in its invoices rendered after the contract is formed.
The Master then calculated interest on the holdback, which because of the parking lot agreement was due from August 16, 2006, at $351,000. She calculated $265,000 in interest from June 15, 2006 on the money due on contract.
Reason
We have taken issue with some of the legal analyses in the Master’s decision. However, we can understand that her decision followed her mindset. She stated it in the following paragraph:
“It is troubling to me that Mondiale (the owner) was content to retain holdback, remain silent as to the formula for calculating the price reduction and then engage in self-help by withholding payments in an amount that Mondiale unilaterally decided it was entitled to as a price reduction. Mondiale conduct(ed) itself in a high handed manner, breaching the contract.”