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Ontario Superior Court Provides Helpful Summary of Consequences of Breaches of Construction Contracts

D & M Steel Ltd. v. 51 Construction Ltd., 2018 ONSC 2171 (S.C.J.)

The Ontario Superior Court decision in D & M Steel Ltd. v 51 Construction Ltd. is of general interest on at least two important topics: (a) the standard of review to be applied by a Superior Court Judge on a motion to oppose confirmation of a master’s report; and, on the legal consequences for both owners and contractors if they are found to be in breach of contract.

In respect of the standard of review on appeal, in jurisdictions where a reference to a master for the trial of a lien action is possible, a motion to oppose confirmation of the master’s report is in effect the appeal of the trial decision at first instance. Justice Perrell confirmed that the applicable standard of review on such a motion is consistent with the standard of review of an appellate court on an appeal from a trial judgment, namely “palpable and overriding error”. This requires a deferential approach such that the master’s conclusions on matters of fact should not be readily interfered with by the judge hearing the motion to oppose confirmation of the master’s report.

The case itself involves many of the elements of a “classic” construction project dispute where an owner and contractor are arguing over a litany of construction issues: deficiencies; alleged extra work; project delay; and, ultimately whether a contract was improperly terminated by the owner or abandoned by the contractor. In the case at hand the disputes had caused the relationship between contractor and owner to deteriorate to a point of crisis whereby the contractor refused to continue with work unless their demands for payment were met. This sort of “stand-off” is all too common a situation in construction projects, and the stakes for clients and the lawyers advising them through such crises are high. It is useful in such situations to return to first principles, and Justice Perrell has provided in his reasons for decision a helpful summary of the relevant law from the perspective of both the contractor and owner.

Ultimately, the actual facts of this case and the court’s disposition thereof are of less interest beyond the interests of the immediately affected parties. That being said, it is worth if for counsel to read this case not just for the helpful statements of law on both the standard of appellate review of a master’s trial decision and on the consequences of breach of contract, but also as a cautionary tale for clients about the risks of embarking on a full determination on the merits of a “project in crisis” through litigation. Both contractor and owner had claims against each other for approximately $150,000. Ultimately the contractor was found to have breached its contract by refusing to work unless it received payments that the court found were not yet due. Justice Perrell affirmed that a party found to be in fundamental breach of a contract was not entitled to an award of damages, and the contractor was therefore only entitled to a judgment of only $1,130.00 consisting of previously approved extras to be paid out of the holdback. The owner, although almost entirely successful in defending the lien action, similarly failed to establish an entitlement to damages for almost all of the counterclaim, and was left with a judgment on the counterclaim for only $560 in inspection costs. Both levels of decision left the issue of legal costs to be resolved by the parties. It is difficult to characterize this result as having been very successful for either side, and no doubt both sides must have incurred significant unrecoverable legal costs, plus wasted time and resources. Again, counsel looking for an example to present clients with a real-world example of how litigation can go horribly wrong for both sides in a construction dispute need look no further.

In reaching this result, Justice Perrell carefully reviewed the law pertaining to breaches by both contractor and owner. The court first dealt with the consequences of an owner’s breach of the construction contract. If the owner without justification ceases to make required payments under the contract, cancels it, or through some act without cause makes it impossible for the contractor to complete its work, then the owner has breached the contract and it has no claim for damages. In this event the contractor is justified in abandoning the work and is entitled to enforce its claim for lien to the extent of the actual value of the work performed and materials supplied up until that time. The court may also award the innocent contractor damages for breach of contract or damages on a quantum meruit basis in lieu of or in addition to damages for breach of contract.

In a quantum meruit claim, deficiencies in the work actually performed are deducted from the value of the work done, but no account is taken of the owner's costs to complete in calculating the contractor’s damages.

The court then reviewed several examples of contractor breach and the resulting consequences. Merely bad or defective work, or insignificant non-completion will not, in itself, entitle an owner to terminate a contract, but the owner will have an obligation to pay for the work and make a claim for damages for the defective work. Nor will an owner be able to terminate the contract because of some minor or inconsequential failure to complete, although the owner may have a claim against the contractor for damages for non-completion or for defective workmanship, which will generally be the cost of completing the non-completed items or remedying any defects. If the contractor breaches the contract, an owner who alleges that the work performed or the materials supplied are defective must provide proper evidence on the basis of which his or her damages can be assessed.

If there are defects in a contractor's workmanship, but not enough to amount to a fundamental breach entitling the owner to terminate the contract, the contractor should be permitted to remedy the defects, and failure by the owner to permit such corrections will disentitle or reduce the amount of damages the owner can claim to remedy the defects as a result of its failure to mitigate.

If a contractor abandons the contract, repudiates the contract, fundamentally breaches the contract, or performs the contract in a way that it is so defective as to amount, in substance, to a failure or refusal to carry out the contract work, the owner is entitled to terminate the contract, to claim damages for breach of contract, and to be discharged from its obligations to pay including any obligation to pay on a quantum meruit or for work already performed.

It is clear from the foregoing that the stakes can be very high indeed when a contractor and owner are at a point of crisis where the contractor refuses to proceed unless paid. Both sides must proceed with caution, and the foregoing legal principles are full of traps whereby each side can find themselves without remedy. In D & M Steel, the contractor was trapped in that the terms of the contract did not permit them to demand the payments at issue and the decision to cease work therefore constituted abandonment. For the owner, the main trap was that they failed to adduce evidence of their damages. In the end, neither side could have been left happy with the result of this “zero sum game”. Of course each case turns on its unique facts, but counsel would be well advised to review both the result and the summary of principles contained in this decision with their clients, particularly when advising either a contractor or an owner on a “project in crisis” as to the risks and consequences they respectively face when both the work and payments have stopped.