Contractor selection usually starts with estimates.
From there, contracts are developed, usually either as fixed price or cost-plus agreements. However, two recent court decisions reveal the legal standing of each is determined by the actual conduct and intentions of the parties.
Let’s begin with estimates. Medusa Contracting was hired by Efficient Quality Homes (EQH) to complete framing on a new home. Medusa submitted a quote of $26,793 and then sent a second quote the next week for $20,500. There was disagreement concerning the purpose of the lower quote.
EQH believed the second quote was more reflective of the actual cost for the work and should be the basis of the contract. Medusa disagreed, saying the lower quote was simply an incentive to gain more guaranteed future work from EQH.
The Alberta Court of Justice agreed with Medusa that the second estimate was an attempt to initiate negotiations which might then later lead to a contract.
“In situations where multiple estimates are present, courts will consider the intentions of the parties when deciding which estimate resulted in a contract,” writes Maxine Fine of McLennan Ross. “The most recent estimate is not necessarily the one that will become the contract.”
The matter of fixed price and cost-plus contracts is a bit more complex.
Twister Developments Ltd. entered into a written fixed price contract with the owner of a two-building project in Wood Buffalo, Alta. Twister was a small company and this was the largest project it had undertaken.
A budget was developed from the building plans, a written fixed price contract signed. Both were used to secure financing for construction. The land was then purchased and a formal contract signed.
However, there was casual conduct demonstrated by both parties.
For example, construction began before the building permits were obtained. Then, the regional municipality initially required the buildings to be explosion-proof, something not anticipated by either Twister or the owner. Although this requirement was later dropped and neither party was found at fault, time and money was wasted.
Further delays were caused by the famous Fort McMurray fire of 2016 which restricted site access and supplies in the region. As the court noted, the fire, “was unforeseeable and truly a force majeure.”
The parties talked almost every other day. As Sean Fairhurst and Jack Yuan of Dentons write, they worked on the project in a rather informal manner, often without adherence to their formal contract.
“The fixed price was determined based on a budget the owner and general contractor created together. They watched budget items and sought cost savings together. The fixed price was mutually amended in light of a price reduction on a large line item.”
Twister presented invoices as work was completed. Each invoice was examined in detail by the project owner personally and assigned to the relevant budget category. He then sent them to the quantity surveyor/project monitor and the bank for review and payment. This was a variant from the normal fixed price contract payment process which typically stipulates progress payments based on the percentage of work actually completed.
Prior to the completion of the two buildings, the owner terminated the contract with Twister and refused to pay Twister’s last invoice. He hired a new contractor to complete the project.
Given the actual conduct between Twister and the project owner, the court ruled their arrangement reflected that of a cost-plus agreement rather than a fixed price contract. The project owner was ordered to pay Twister the outstanding balance of $173,012.08.
Justice M.E. Burns of the Court of King’s Bench of Alberta referenced a ruling from 2001 that read in part, “written contracts must be treated with respect. However, when, as here, the subsequent conduct of the contracting parties point to the conclusion that they do not consider themselves to be governed by the contract’s terms and instead developed an alternative arrangement established on clear evidence, it is unreasonable to impose the written contract on the relationship.”
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to email@example.com.