By Jonathan Martin, Miller Thomson Lawyers
The contract negotiation stage is rightly regarded as an important part of a successful construction project. However, in too many cases, the parties to a construction contract put their agreement to the side once the “real work” begins.
But it should never be forgotten that a contract represents the legal regime that is in place between the parties and the parties should therefore strive to ensure that all their dealings are conducted in accordance with its terms. Professional contract management, which aims to identify areas in a contract where differences could emerge and strategically address them in advance, should be considered – especially for more complex contracts. A couple of recent decisions shed light on what can happen when contracts are not properly managed.
Ambiguous price provisions
In Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 ABQB 11, the parties had negotiated a fairly complex and sophisticated contract that suffered from one major ambiguity around the price. The court ultimately found in favour of the University of Calgary and dismissed Riddell’s $1.8 million claim.
The ambiguity had to do with the contingency of rising construction costs in the City of Calgary between 2006 and 2010, and how that risk should be covered. Riddell argued that it had sought to cover this risk by stipulating that the price of the contract was to be 8.71 per cent of the final construction cost, which turned out to be $52,622,480. The University of Calgary argued that the 8.71 per cent was a fixed fee based on the construction cost of $18,750,000, which was estimated at the time the contract was signed and that all fee increases were to be covered through the “Change Order” provisions of the Contract. A final construction cost to the tune of $52,622,480 meant that there was approximately $1.8 million dollars to litigate. The judge noted from the outset the importance that contract management had in determining the ultimate outcome of the litigation:
 …considering the cost and importance of the project, it seems that, at times, little attention was paid by the parties to the manner in which the Service Agreement was prepared, reviewed and administered. The university prepared and presented an agreement containing confusing and ambiguous language in respect to one of its most important provisions: price. RKA signed that agreement without seeking clarification. It further subsequently signed off on Change Orders, which arguably resolved any contractual ambiguity in the university’s favour, without any apparent protest or misgivings. Only after a potential professional negligence claim surfaced did RKA raise an issue of interpretation. Even then, the issue was only raised after the principal owner involved had read the Service Agreement for the first time.
Throughout the execution of the contract, the University of Calgary acted in accordance with its interpretation of the contract in periodically documenting all fee increases through change orders. Each change order stated that it was modifying the original contracted fixed fee. Riddell signed off on each one without raising any disagreement as to what the change orders meant. The court found that post contractual conduct can be considered in the resolution of ambiguity in the contractual language used.
Essentially, the well-managed post-contractual conduct of the University of Calgary played an important role in its ultimate success in court.
Extras and back-charges
Impact Painting Ltd v. Man-Shield (Alta) Construction Inc., 2017 ABQB 743 was an action between the general contractor and the painter subcontractor arising from the construction of a residential retirement facility. Upon completion of the project, the paint subcontractor, Impact Painting, issued invoices for extras, which were disputed by Man-Shield. Impact claimed for $237,676.12. Man-Shield counterclaimed.
What jumps out of the decision is that Impact Painting had almost no documentary evidence to show for nearly a quarter million dollars of extras it was invoicing for. In many cases, there was no evidence the work had been done at all other than the principal’s word, which the court generally did not accept as sufficient to prove these claims. In other cases, there was no documentary evidence that the work had been requested. In the end, only $57,397.86 was granted to Impact.
This case illustrates the importance of carefully documenting everything that takes place in the course of a construction contract. Often in the rush to meet deadlines, contractors will neglect to keep detailed records of what they are doing. This can be a costly mistake.
The consequences of a mismanaged contract can include under/overpayment, litigation expenses, unsuccessful litigation and damaged relationships. Keep good records and be aware of the risk areas and ambiguities in your contract. Parties to complex contracts are encouraged to seek out professional contract management services. Legal professionals can work with you on a number of fee arrangements to ensure that you are properly covering your bases every step of the way.