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Legal Notes: A complex mix of cost-plus contracts, verbal agreements and change orders

John Bleasby
Legal Notes: A complex mix of cost-plus contracts, verbal agreements and change orders

Geo A. Kelson Company Limited was hired as a subcontractor on a large project. Kelson in turn sub-subcontracted A. Amar and Associates Ltd. to perform the sheet metal work at a fixed price. Labour issues resulted in Amar adding workers from Sjostrom Sheet Metal Ltd., something Kelson was not aware of at the time. A few months later, Sjostrom workers walked off the job due to payment issues with Amar.

Kelson, now aware of Sjostrom’s involvement on the project, reached an unwritten agreement with Sjostrom to continue work and be paid directly by Kelson. A subcontract change order was issued, reducing Amar’s sub-subcontract price by an amount equal to the work that would now be completed by Sjostrom.

Three months after that, Sjostrom again left the site, claiming non-payment under its agreement with Kelson.

When Amar was asked by Kelson to return to finish the work, Amar declined, saying as a result of the change order, sheet metal labour was no longer part of its scope of work described under their initial sub-subcontract agreement. Amar said Kelson would have to increase the contract price to reinsert this additional work.

Since no written agreement existed between Sjostrom and Kelson, the court had to consider whether an enforceable oral agreement existed.

The court determined Kelson’s submissions succeeded in establishing the existence of an agreement. On the other hand, as the legal experts at Singleton Urquhart Reynolds Vogel LLP write, “Kelson’s statement of defence failed to dispute Sjostrom’s claim of the existence of a direct contract between Kelson and Sjostrom. Rather, the court found that Kelson unintentionally acknowledged the existence of a direct contract with Sjostrom.”

This was in addition to the establishment of the five elements necessary for formation of a direct contract.

Once the existence of a contact was established, the court then considered whether Sjostrom was entitled to payment from Kelson as claimed.

Here, the court ruled Sjostrom failed to prove its damages, with the numerous shortcomings summarized as a lack of corroborating evidence to support the hours logged in Sjostrom’s time summaries.

What about the change order and its impact on the contract between Kelson and Amar?

“The court made a number of findings that, taken together, demonstrated that Amar was not involved or kept apprised of Sjostrom’s work on the project until called back to the site,” write McCarthy Tétrault LLP Associate Ivan Merrow and articling student Meg Heesaker.

“As a result, the court concluded that the change order removed the remaining sheet metal labour from Amar’s scope of work in its sub-subcontract with Kelson.”

Therefore Amar was not found in breach of the contract and was entitled to the value of the additional work it performed on the project from that point.

The McCarthy and Singleton authors offer similar takeaways from this case.

“Inconsistencies, as seen in this case, can lead to unexpected outcomes,” write Singleton. “It is crucial that parties take care when drafting such documents in order to ensure their pleadings align with the theory of their case.”

Merrow and Heesaker remind that, “Direct agreements with sub—sub-subcontractors can be formed even if there is no formal written agreement between the parties. For clarity and mutual understanding, agreements and change orders in writing are preferable to verbal agreements.”

Furthermore, claimants under cost-plus agreements must meet a high evidentiary burden to establish diligence and the economical use of labour and materials.

“To prevent disputes when circumstances change, all parties should have a shared understanding of change orders and how they will impact the scope of work going forward,” concludes Singleton.

“Construction industry participants would be well advised to be candid with counterparties if and when the cost estimate will be exceeded (or when it is anticipated to be exceeded), so as to avoid unpleasant surprises and acrimony. Successful projects are often those which operate on the basis of a cooperative and collaborative relationship, and in that regard, financial candor is arguably no different.”

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to

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