August 1, 2014
A case study: Whose work is it, anyway?BY ROBERT KENNALEY
In a debacle we are in the middle of, an owner decided to build a retail mall in a small town. In doing so, he lined up a prime tenant to rent two-thirds of the space. The lease between the owner and the tenant set out how the construction costs, including the build-out of the tenant’s space, were to be divided between the two. It provided that the owner would pay its contractor for this work and then seek reimbursement from the tenant for its share of the costs.
Rental rates between the two were agreed upon, based on concept drawings. Unfortunately, the concept drawings provided little detail of how the spaces were to be built out. The Lease, however, required the owner to provide the tenant with detailed construction drawings for the tenant’s approval. The tenant committed to leave its current space, based on the occupancy date set out in the lease. The owner’s contractor started work on the building, but no construction drawings had been issued for the build-out of the tenant’s space by the time the contractor was ready to move into these areas. Also, delays had been encountered. Accordingly, the tenant (who was under pressure to move in) had its consultant prepare the construction drawings for the build-out of its space. These provided the details, finishes and components of the build-out.
Owner not focused on work
Although the owner was somewhat missing in action, it was generally copied on what the tenant was selecting by way of details, finishes and components. The contractor built the work to the tenant’s consultant’s specs and everything seemed fine until it came time to reconcile the cost of the work.
The owner said the cost of the work exceeded his budget for a standard build-out by over $500,000. The tenant relied on the lease and said it had only agreed to pay for certain specified items of work. The tenant flatly refused to reimburse the owner for the cost of any other items. The tenant said that, if the owner or contractor believed that any specified detail, finish or component was to be an ‘extra,’ the owner or contractor should have made that clear. Because the owner did not object, the tenant said it proceeded on the basis that everything was fine.
The contractor, who had not been paid for the last $500,000 of work, just wanted his money. His contract was with the owner; however, he had taken instructions from the tenant and the tenant’s consultant. Now, the owner was telling him he would not be paid until the owner managed to collect from the tenant. Alternatively, the owner suggested that it had not requested or contracted for the ‘extra’ work — and that the contractor should thus pursue the tenant or tenant’s consultant directly for these amounts, pursuant to a separate contract to which the owner was not even a party.
Contractor performing work outside contract
The contractor, of course, had a problem. He had proceeded with work on the instructions of someone who was, essentially, a stranger to his construction contract. Cases going back to ‘old kings in England’ say the contractor isn’t entitled to be paid for work not approved in accordance with the contract. On the other hand, there are lots of cases that have nonetheless required the owner to pay — on the basis of unjust enrichment (because the owner shouldn’t get work for free) or on the basis of an implied approval.
The owner had a problem in that the Lease said the tenant only had to pay for specified items of work. The owner had sat back and let the tenant order more and better details, finishes and components without raising any objection. To make matters worse, the tenant took the position that, if it was dragged into litigation over the construction costs, it would make a claim for the impact of the delay in obtaining occupancy (it had to pay for other space for a time) and a claim to be reimbursed for the cost of having its consultant do the designs in the first place (given that these were the owner’s responsibility).
The tenant, of course, also had a problem. If the owner did not contract for the work, then the tenant or his consultant did. A judge might be reluctant to let the tenant have a premium design without paying for it. A judge might also make the tenant pay for components that were not shown in the concept drawings.
Making the problem even more difficult — and impossible to assess with any degree of accuracy — was the fact that no clear dividing line could be drawn between what the owner had agreed to pay for and what the tenant had instructed the contractor to build, over and above that standard. In addition, even with $500,000 at sake, litigating the issues would be extremely expensive and hardly worthwhile. There were literally tens of thousands of emails amongst the parties dealing with the work and the leasehold issues — because it was a work in progress that took almost two years to design and build.
Simple fix: Follow contract terms
All of these problems could have been avoided, of course, had the parties adhered to a basic principle: parties need to follow the contract in terms of who is entitled to direct work or approve ‘extras,’ and must ensure that the proper contractual channels are followed in determining the scope of work. Contractors need to refuse to do work that is not authorized as required under the contract. Owners need to be uncompromisingly firm in demanding that all work-related inquiries be directed through its representatives under the contract. Consultants or third parties need to be vigilant in ensuring that nothing they do will somehow create a contractual relationship between them and the owner’s contractors.
Had this principle been followed, by even one of the parties, there would be no problem. Instead, everyone proceeded on their own (incorrect) assumptions about what was understood by all, and in the meantime $500,000 of work was performed for whom no one was willing to take responsibility. In the end, we all know what they say about the word ‘assume’ — and here the donkey will come with quite a price tag.
Robert Kennaley has a construction background and practices construction law in Toronto and Simcoe, Ont. He speaks and writes regularly on construction law issues. Rob can be reached at 416-368-2522, at firstname.lastname@example.org, or on LinkedIn. This material is for information purposes and is not intended to provide legal advice in relation to any particular situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.