Contract or No Contract?

Elementary, my dear Watson, if a fly on the wall listening to the parties concludes that the parties are not of one mind (“consensus ad item”) on the scope of work, there is no contract. And, if there is no contract, then a partial performance by one of the parties may only be partly recompensable by an expensive Court action for unjust enrichment because this claim only pays the benefit to the other party, plus some legal costs, not the direct costs and margin expected by the party who so performed. Put simply, don’t perform where the contract (whether verbal or written) is not clear about the scope of work. If you do, then you risk collecting about half. Not good. Yet, I see this kind of circumstance arising every time a general contractor seeks a subcontractor’s quotation or bid price and the subcontractor responds with a price specifically qualified by exclusions to the scope of its work.

It’s not infrequent to see a general contractor ask a mechanical contractor for a price to complete the entire mechanical scope in the spec’s and drawings, while the mechanical subtrade will respond with a Quotation clearly and expressly excluding work such as fire suppression and piping insulation. If this Quotation is transmitted via a bid depository, then the general contractor usually has two days to consider whether to use the subtrade’s price in its pricing to the owner. But, in Saskatchewan it is now more common that the Bid Depository System is only being used for Government projects. Thus, given the trades have a high anxiety of the risk that general contractors will bid shop their pricing, trades are for most non- government projects delivering their quotations directly to the general contractor shortly before the general contractor is required to assemble and submit its price to the owner. In these circumstances, the general contractor has little time to consider the price impact of the trades’ qualifications and thus it adopts the trades’ quotation and hopes that if it wins the owner’s project, it will be able to twist the trade’s arm or make a tolerable deal to get the mechanical work cost-effectively performed. Sometimes, the trade will refuse to sign the subcontract because the scope of work doesn’t reference the exclusions in its quotation, but still perform! This can be dangerous. If the trade decides to perform without a contract, can the law help the trade to fully collect its quoted price without completing the excluded work? Or is the best the law will do is, after the delay and costs of a Court action, force the general contractor to only pay unjust enrichment? It depends. A couple of recent cases may give you some notion of where the law stands.

The Alberta Court of Appeal case of Ko. V. Hillview Homes involved the developer design-building a 4,500 sq. ft. new house together with providing the lot for $1.2 million. The parties signed a 2-page written agreement which spec’d the work as follows:

The builder’s existing standard plan for a 2,834 sq. ft. Los Cabos II (an architect’s frontal elevation sketch plus floor plans) plus an additional 1,666 sq. ft. at $80.00 per sq. ft for this addition.

This agreement gave “no clue” as to either the nature or location of the extra 1,666 sq. ft. And, over the next 5.5 years, the developer did nothing while the purchaser froze resale of the lot by registering a caveat against it.

The home purchaser claimed that he had lost an opportunity to resell the house and lot during the rich phase of the Edmonton market and sued for lost profits, while the developer defended on the basis that the written document was only a mere estimate, not a contract, because the scope of work was too uncertain. The trial judge ruled in favour of the purchaser by finding that the developer had breached the agreement and ordered that the developer pay damages reflecting this lost opportunity of profit by resale in the Edmonton market.

The Alberta Court of Appeal totally reversed the trial decision; the developer paid no monies, got its title to the lot cleared of the caveat and had all of its Court costs, both at trial and in the appeal, paid by the purchaser. Here’s the Court’s explanation:

1. Judges may not make bargains for the parties on the basis of what the Judge considers fair.

2. The aim of contracts is to let the parties govern themselves by making their own self-imposed rules.

3. Commerce needs predictability, which is more important than fairness.

4. Where the thing to be built is not clear by the agreement (either verbal or written), an essential term is missing and a contract cannot exist unless:

The parties have delegated to a third party the unfettered power to fix the scope of work;

Some clear usual trade custom can be found to render the scope of work clear; and/or

The parties have agreed to a specific publication or an existing project which clearly fills in the gaps of the parties’ agreement on the scope of work.

5. Here, the Los Cabos II plan was referenced, but it was for a house 59% smaller than the parties agreed floor space and there was no scope of work for this 59%.

6. Further, here the purchaser was not entitled to unjust enrichment because there was no evidence that the developer had benefitted.

The second case is from Ontario, 1269016 Ontario Ltd. v. Ellis. This dispute began simply as a contractor’s lien claim for its $27,880 final payment after completion. It only became interesting when the owner responded by defending on the basis that the contractor had not completed the contracted work. Here are the material facts:

7. Initially, their agreement consisted of a verbal discussion for, depending upon who you believe:

A price of either $33,000 including tax or $52,880 plus tax; and

A scope of work either for 4 exterior 10 ft. walls above-ground or only 3 10 ft. walls plus an 8 ft. wall.

8. But, before starting the work, the contractor drafted and signed a written agreement which prescribed:

A $52,880 plus tax price payable upon milestones; and

The work included only three 10 ft. walls and an 8 footer along the existing building.

9. The contractor delivered this written agreement to the owner 5 days before start-up but the owner neither signed nor protested the draft agreement.

10. Rather, the owner paid the first 3 milestones and a portion of the 4th and then refused further payment until the contractor had completed the 4 walls to a height of 10 ft.

In these circumstances, the Court concluded that the parties had a verbal agreement which by their behaviour after its delivery adopted the terms of the document concerning price and scope of work.

Conclusion

While I have not come across a case directly answering the question whether a trade’s qualified quotation/bid to a general contractor’s invitation creates a legal contract between them, my cautious conclusions are as follows:

11. A trades’ qualified quotation/bid is a counteroffer not enforceable by either until the general contractor unequivocally accepts the trades’ exclusions; but

12. If the general contractor lists this trade in its competitive bid form to an owner, it has a legal duty to the Owner to use this trade on the project unless it has a reasonable construction explanation that it can’t get reasonable terms and thus has subcontracted with an approved substitute;

13. If a trade in response to its qualified quotation for a non-competitive bid project receives a letter of intent or draft subcontract from the general contractor which does not accept the trades’ exclusions, it should neither start work nor, if it has already started, continue working until it makes a deal for the scope of work it wants;

14. This means that if the trade has started work before receiving the general contractors letter of intent or subcontract prescribing an unacceptable scope of work, its only leverage in getting the scope of work shrunk to what the trade expected and quoted is to pull its forces and threaten a legal action for unjust enrichment; not good.