October 1, 2016

Back-charges for deficiencies, and fundamental breach


Rob Kennaley In 2010, the owners of a property in Ottawa hired a contractor to build a home and then install a stone facade around it. Under the contract, the owners were responsible for supplying the stone. There was no question the stone would have to be on site upon completion of the home, to ensure the wall could be completed before winter weather set in. The contractor said he was ready for the stone by late September, but it was not on site. The contractor then left the premises. Some of the stone was supplied in early November, but not all. The contractor started the stone installation on Nov. 3, but soon ran out, prompting him to leave the site for a second time.

By now, of course, the contractor was running into cold weather and associated impacts on exterior wet-laid stone installations. The contractor suggested the work could be completed in spring, at no additional charge. However, the owners insisted that work proceed immediately. The contractor advised that proceeding would be possible, but there would be an additional charge to tarp and heat the work areas.

The contractor said the owners balked at the additional cost, and told the contractor to leave the site. The owners denied this, saying the contractor was not ready for the stone until November, and therefore the contractor should have incurred costs for the winter work. They also denied telling the contractor to leave the site. The contractor sued for the balance owing on his contract, and the owners counterclaimed for delays and the costs of rectifying and completing the wall.

The contractor’s claim took four days of trial time to resolve. The Court held for the contractor on virtually all issues, holding that on every contested issue the contractor’s witnesses were credible — and the owners were not.

One interesting issue related to deficiencies: because the walls were incomplete when the contractor left the site, the contractor admitted (not surprisingly) that there were some deficiencies. He said, however, that he intended to address deficiencies at the end of the job, and remained willing to do so at all material times. The owners did not ask the contractor to address deficiencies, but attempted to back-charge the contractor for the cost of rectifying them. The owners argued the contractor should be paid only for the value of the work he had performed, up to the date he left the jobsite. Why, they wondered, should an owner have to pay more than the value of work actually received?

Owners often try arguments on ‘for size.’ Sometimes, they argue they have ‘lost confidence,’ and don’t trust the contractor to do work properly and in a timely fashion. Sometimes they argue the contractor improperly abandoned the project and walked off the job, telegraphing to owners he had no intention of responding to deficiencies under warranty. In other circumstances they argue none of the above matters: the contractor should not be paid more than the value of work performed.

In its decision, the Court referred to a number of cases which had established a contractor has a right to return to a jobsite to repair deficiencies in certain circumstances. Upon analyzing the cases, the Court determined when work stops on a construction project, the Court must then decide which of the parties breached the terms of the agreement. The Court held that it is reasonable for the owner to provide the contractor with an opportunity to return to correct deficiencies, if:
  • the contractor was prepared to correct deficiencies at no charge,
  • there was no ‘fundamental breach’ by the contractor, and
  • there was no urgency requiring immediate repair.

The Court further held that if the owner then fails to provide reasonable opportunity to correct deficiencies, the owner is not entitled to back-charge costs of having the deficiencies repaired by a third party.

A fundamental breach is a breach which goes to the ‘root’ of the contract. It is the type of breach that allows the other side to say: ‘Because of this breach, I did not get something which was so fundamental to the contract that I now, because of the breach, consider the contract to be at an end.’ Fundamental breaches are significant, and fairly rare. For example, where an owner contracts for a marble floor comprised of 2 x 4 ft. pieces in a herringbone pattern, and the contractor installs 1 x 1 ft. ceramic tile, the owner can claim fundamental breach, consider the contract as at an end and refuse to allow the contractor to rectify deficiencies. Where, however, there are merely deficiencies in the installation of the 2 x 4 marble, the contractor is entitled to rectify the deficiencies, so as to mitigate damages.

The analysis set out in this case (Rocksolid v. Bertolissi, 2013 CarswllOnt 16468) is generally applicable to the relationship between parties further down the construction ladder (between contractors and subcontractors, and between subcontractors). It is also generally applicable in most Canadian jurisdictions, although each case should be considered on its facts and in accordance with applicable local jurisprudence.

Contractors and subcontractors should therefore be aware if deficiencies are allegedly outstanding, in the event of a dispute with the person who hired them, they should consider making it very clear to the other side they remain willing and able to rectify any actual deficiencies in their work, so long as they are paid. In many cases, they should request particulars of the alleged deficiencies, and an opportunity to attend the site to review the same (in order to assess whether or not they agree the deficiencies are, in fact, their deficiencies). In this way, they position themselves to take advantage of this line of case law, in the event (as often occurs), the other side refuses to cooperate and give the opportunity to attend, review, and correct deficiencies.    
Robert Kennaley practices construction law in Toronto. He speaks and writes regularly on construction law issues and can be reached for comment at 416-368-2522 or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.