Advanced Precast Inc. v. Brown Daniels Associates Inc.
Ontario Superior Court of Justice
Master C. Albert
May 10, 2013
A contract is, in legal terms, “frustrated” when its full performance is made impossible. The following summary illustrates what happens when a contract between two parties – Advanced Precast Inc. and Brown Daniels Associates Inc. in this case – is frustrated by the actions of somebody who is not a party to the contract.
On September 28, 2010, a company called 777 Bay Street Inc. (777), the owner, and Brown Daniels Associates Inc. (BDA), the general contractor, signed a contract using the CCDC-2 2008 form to effect repairs to the owner’s building. BDA then entered into a subcontract in the amount of $43,000 plus taxes with Advanced Precast Inc. (API) for the precast concrete portion of the main contract. API, in turn, lined up several subtrades to perform the work.
In January 2011, when one of API’s subcontractors arrived on the site with its workers and heavy machinery, it encountered several problems.
The first problem was that BDA was concerned that the equipment would be too heavy for the location in which it had to be placed to carry out the work. The second problem they discovered was that the existing fasteners used to attach the precast concrete panels to the building were different from those shown in the drawings and specifications. It became clear that the existing precast concrete panels could not be removed without major damage to the panels.
While the API contract provided for replacing panels as required for the additional price of $1,500 per panel, neither party had intended or expected that most or all of the panels would have to be replaced.
Because of these problems, the project consultant, B+H Architects, issued a Proposed Change Notice (PCN) that removed from the API contract a major portion of the work.
In response to the PCN, BDA required documentation from API as to what costs it had already incurred so that it could negotiate a reasonable change in price that would reflect monies already expended on the portion of work that was to be eliminated from the main contract and, in turn, from the API contract.
However, API took the position with BDA that its contract was a fixed price contract and that API was not required to renegotiate the price if the owner reduced the scope of work. At trial, API also argued that, in any event, its costs by that date added up to the contract price even though only about 12 or 13 percent of the work required under the API contract had been completed.
Despite repeated requests, API never gave BDA the documents it needed to prove to 777 how much API had actually spent before B+H issued the PCN.
After several months, B+H performed its own calculation of the price change attributable to eliminating part of API’s work from the contract and issued a Change Directive (CD) reducing the price of the main contract by $40,000.
BDA’s position was that the price reduction was a pass-through to API. By contrast, API’s position was that BDA had to absorb the price reduction because the API contract, being a fixed price contract, did not allow for a unilateral change in scope or price. BDA refused to pay any portion of the API contract so API registered a lien for $48,590 plus tax.
Breach or frustration of contract
At trial, API argued that BDA breached the contract when it unilaterally reduced API’s scope of work and changed the price. BDA’s position was that the API contract was subject to the main contract, and that the provisions regarding changes passed through from the owner to the general contractor, and from the general contractor to its subcontractors.
API admitted that BDA’s terms and conditions formed part of the contract, and that subcontractors were deemed to have inspected the full contract documents.
Master Albert of the Ontario Superior Court of Justice reviewed the contractual procedure in the CCDC-2 document dealing with changes.
Part 6 of the Contract provides that the owner has the right to unilaterally change the scope of work.
GC 6.2 Change Orders sets out the mechanism for determining the price adjustment for changes. The consultant (in this case, B+H) must provide a written description of the proposed change to the contractor, BDA. The contract requires BDA to promptly present to B+H a method of adjusting the contract price. If the owner, 777, agrees to the price, the change is effective immediately.
If there is no agreement, GC 6.3 Change Directives specifies how a price adjustment is achieved based on the contractor’s actual expenditures and savings attributable to the change, with a method for valuing the expenditure. It provides that if the change results in a net decrease in the contractor’s costs, the contract price must be decreased by the amount of the net decrease in the contractor’s costs, without an adjustment o the contractor’s percentage fee.
This section of the main contract also provides that if the parties cannot agree on the price adjustment, the adjustment must be referred to the consultant for determination.
API asked the court to accept that notwithstanding 777’s right to unilaterally change the scope of work of the main contract, BDA did not have the right to pass those changes on to API because the API subcontract did not expressly include the change order provisions.
Master Albert disagreed. She found that the API subcontract clearly incorporated by reference those provisions of the main contract that pertained to the concrete component of the work required by the main contract. She found that, included in those provisions, incorporated by reference, were the provisions pertaining to change orders.
When 777 reduced the scope of work, BDA had no choice but to bar API from performing the concrete work that the owner had removed from the main contract. The actions of the owner prevented BDA from complying with the API contract, and also made it impossible for API to perform its contractual duties – in other words, the performance of its subcontract was frustrated.
Duty to mitigate
Once the API contract for a fixed price was frustrated, API had a duty to mitigate its damages i.e. take all reasonable steps to minimize its losses and prevent additional losses. The consultant’s CD required API to produce evidence to support reasonable costs attributable to the proposed change. API had invoices from its subcontractor to support its claim but did not provide this information to BDA.
Had API been forthcoming with its documentation to support the revised contract price, BDA would have been in a position to negotiate with 777 for a reasonable price to reflect the change in API’s scope of work. Because API refused to co-operate, BDA could not do this. B+H then estimated the price adjustment, and the project’s books were closed.
Any amount found owing to API over and above the balance of the concrete contract price after applying the $40,000 price reduction certified by B+H in the Change Directive had to be paid by BDA out of its profits and could not be passed through to the owner.
Master Albert found that API did not take reasonable steps to mitigate and therefore had to share responsibility for its losses. She found that BDA also failed to reasonably mitigate: when API failed to co-operate, BDA simply gave up and did not participate in the price adjustment procedure with B+H for the concrete work.
BDA knew that API had incurred standby charges and, at a minimum, BDA should have estimated those standby charges and presented its calculations and whatever backup documentation it could gather (time sheets from its own site superintendent, union rates and numbers of workers on standby, for example) to B+H in an effort to recover some portion of the standby charges.
Master Albert concluded that BDA must share some responsibility for the significant price reduction issued by B+H.
When a contract is frustrated, the court must apportion the losses. Master Albert apportioned two thirds of the liability for failure to mitigate to API and one third to BDA.
This was not a case where BDA breached its contract with API. The contract was frustrated – its full performance was made impossible – by the owner who was not a party to it. Damages therefore had to be quantified on the basis of quantum meruit (“as much as earned”).
The Master found that the total value of the materials and services that API supplied to BDA under the contract was $25,631, including HST. API was two-thirds liable therefore it was responsible for $17,087 of its damages, and BDA was responsible for $8,544.
There remained the question of costs of the action. BDA paid no part of the contract price to API, not even the amount that it recovered from the owner under the main contract. API was left with no choice but to pursue its claim in the courts.
The amount in issue was small. The facts and issues were not complex. Two-thirds of liability for failure to mitigate was attributed to API. Taking into account these factors, the Court decided that an appropriate award of costs was $5,000 for legal fees plus $1,360 for HST and disbursements, payable by BDA to API.
Revay and Associates Limited,
Founding Editor, Construction Law Letter
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