Legal Blog

Overreaching

Disputes between an owner and a general sometimes degenerate into a situation in which the general abandons the job. The general then registers a lien and claims for the money that it says the owner owes it. At the same time, the owner gets another general to finish the job. The real loser in this scenario can usually be determined by answering the following question: did the owner breach the contract such that the general had a right to terminate it?

If the owner breached the contract, the owner must pay the general for the value of the work that the general supplied to the project. If the owner did not breach the contract, it need only pay the general the contract price less the owner’s cost to complete. Inevitably, the general will receive far less in the second scenario than in the first because the cost to complete, after obtaining the services of another general, is usually far greater than what it would have cost the general to complete the work. The same scenario applies equally well between a general and a sub.

There is no shortage of cases with this scenario because, it seems, contractors and owners like to play Russian roulette. The case of Marden Mechanical Ltd. v. West-Con Developments Inc., a 2007 decision of the Ontario Superior Court of Justice, is the latest example.

Contract

A contractor was to install sprinklers for the owner. The contract price was only $95,000 so that, aside from a quote setting out the work to be done, the parties did not bother to sign a contract outlining the terms of the deal. This was a mistake.

The contractor started its work with a flourish, but then let the work languish. About three weeks later, the contractor, who had done almost nothing for two weeks, delivered an invoice for $30,000. The owner was concerned about the contractor’s glacial pace and the amount of the invoice. The owner’s engineer told him that the contractor had completed only $15,000 worth of work.

The contractor insisted on being paid the full $30,000 before it would go back to work; the owner was willing to pay $15,000, but first needed the contractor to agree to return to work. The contractor billed another $29,000 for work that it alleged it did after the first invoice and then walked off the job.

The contractor had calculated the value, for which it insisted it should be paid, based on the cost it incurred in its work. That cost included raw materials purchased that were not delivered to site and materials delivered to site that it had not installed.

The owner required sprinklers in its building and therefore found another sprinkler contactor to complete the job for $81,000. The new sprinkler contractor declined to use the materials that the contractor had left on site.

Who’s Wrong? 

Failure to pay is a breach of contract allowing the unpaid person the right to terminate the contract and be paid for the work that was done (and its lost profit on the remainder of the work to be done). Conversely, failure of a contractor to continue with the work on a reasonably timely basis is also a breach of contract entitling the owner to terminate and deduct the cost of the replacement work from the original contract price. So, in this case, who breached the contract?

The judge was not impressed with the contractor’s statement that “every customer wants its work to have priority and that it cannot be in all places at all times.” The judge noted that a contractor should not undertake work if it does not have enough workers to complete the job in a timely fashion. The judge did not feel that it was reasonable to start with a bang to secure contracts and then allow a project to languish because of a lack of workers.

Arguments

The owner argued that, since the contract was silent regarding payment, the owner did not have to pay the contractor until it had completed its work in full. The judge disagreed. He felt that, as a rule of thumb, if the contract time exceeded one month (as it did in this case), progress payments were in order.

However, the judge held that progress payments had to be calculated based on the work actually performed on the project. The cost to the contractor was utterly irrelevant. Accordingly, the contractor’s costs of materials that had not been supplied or that had been supplied to the job and not installed were not to be included in the progress billing. That resulted in the bills of the contractor being far too high. The owner’s estimate of $15,000 was closer to the actual value than the contractor’s demand for $59,000.

The judge noted that by the time the first progress payment was due, the contractor had not had anyone on the job for two weeks. Further, when the contractor walked off the job, there was no agreement on progress payments and there was no commitment from the contractor to complete the work in a timely fashion. Accordingly, the judge held that it was not a breach of the contract for the owner to decline to pay anything to the contractor until the contractor addressed its issues.

If the owner did not breach the contract, who did? When the contractor walked off the job, after demanding payments to which it was not entitled (because it had not actually supplied value to the job in the amount claimed), it was in breach of the contract. At that point, the owner was entitled to treat the contract at an end.

Result

The judge held that the owner had to pay the contractor only $14,000 (i.e. the difference between the contract price of $95,000 and the cost to complete of $81,000). The judge did not penalize the owner for failing to use the materials that the contractor had delivered to the site and that the new contractor declined to use. The contractor gave no evidence of the salvage value of those materials and, even worse, initially threatened that it would take those materials from the site and then did not do so. When the owner took the contractor at its word, the contractor could not validly complain about the owner’s decision not to use the contractor’s materials.

Because of its gamble, the contractor supplied work that allegedly cost it $59,000, but because it failed to complete the work in a timely manner and abandoned the contract, it received only $14,000 for its efforts. In essence, although it had a small judgment, the contractor lost the action. We have no doubt that the owner served a formal offer to settle for at least $15,000 and that not only will the contractor be paying its own lawyer, it will be paying the owner’s legal costs, at least in part.

Walking off the job is very dangerous. We almost invariably advise our clients to finish the job and then sue for the money owed.