Litigation Points In Construction Contracts
Melvin L. Rothman
Introduction
By way of introduction to the general nature of Construction
Contracts and the sources of law thereon, one might recall that these
contracts fall into the general category of “lease and hire of work”.
Article 1666 C.C. speaks of three principal types of work that may
be leased or hired, the third item of which is “builders and others
who undertake work by estimate and contract”.
Construction Contracts are, of course, subject to the general rules
of contract contained in the Civil Code, but in addition, they are
subject to certain special rules as laid down in Article 1683 C.C. and
following.
Independence of Contract
One of the essential features of the Construction Contract is the
independent status of the contractor; unlike an employee in a con-
tract of lease and hire of services, the contractor is not subject to
the direction and control of the owner. He is free to choose, super-
vise, and dismiss his own employees and do the work as he sees fit
so long as he completes it in accordance with the plans and specifi-
cations. One very important consequence of this independence is that
the owner is not vicariously responsible in delict for any damage
that might be caused by the fault of the contractor or any of his
employees. Since the contractor is not an employee, Article 1054
C.C. does not apply. The owner could be responsible under 1055
C.C. but here it would have to be established that the damage was
caused by the “ruin” of the building and this is often difficult to
establish.
In Quebec Asbestos Corp. V. Couture,’ the owner was sued in
delict for damages caused by the fault of one of the contractor’s
employees. The Supreme Court dismissed the action basing itself
on the complete lack of subordination that existed between the con-
* Of the Bar of Montreal. The present article was delivered as an address at
the Junior Bar Symposium, November 19, 1964.
1 [1929] S.C.R. 166.
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LITIGATION POINTS IN CONST. CONTRACTS
195
tractor and the owner. The judgment lays down some of the guide
lines for determining the existence of a “contrat d’entreprise” –
no
subordination, freedom to choose and supervise employees, payment
for work and not time, etc.
Form
As to the form of building contracts, in Bolduc v. Houle 2 it was
held that no particular form is required and the contract may even
be verbal, subject of course, to the problems of proof one can have
with verbal contracts. Certainly, verbal proof can be made against
a contractor or sub-contractor to prove the contract itself since they
have been held on many occasions to be “commergants”, but the
contractor might have difficulty proving a verbal contract against
the owner, and as will be seen, there are certain strict requirements
against proving “extras” without a writing.
Extras
One of the most frequent problems in construction contracts is
the problem of extras. Article 1690 C.C. provides that whenever a
builder or architect undertakes a job upon plans and specifications
at a fixed or lump sum price he cannot claim any additional sum on
grounds of any changes in the plans or specifications or any change
in the cost of labour or materials unless such change is authorized
in writing or unless he can obtain an admission under oath from the
owner. The purpose of this article is to protect the owner from any
fraudulent or unwarranted claims by the contractor.
There are a great many cases on this article, most of which
make it quite clear that it is imprudent for the contractor to pro-
ceed with any deviation from the plans without written authoriza-
tion. But the article has been given a restricted interpretation on
occasion. In Tetrault Freres V. Nantel,3 the Quebec Court of Appeal
held that this requirement of Article 1690 does not apply where
there are no plans and specifications, even where a fixed price has
been agreed upon in the contract. Similarly, in Leblane v. C6t6,4
Article 1690 C.C. was again restrictively construed. The contractor
had agreed to build two stories with the second story left unfinished.
After the work had started, the owner instructed him to finish the
second story. The court held that this was neither part of the con-
tract, nor an extra, but a new agreement.
2 [1962] C.S. 416.
3 [1959] B.R. 339.
4 [1943] C.S. 351.
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In Towstuck v. Brisebois – it was held that in the absence of a
writing, a specific admission is required for each item of extra work.
A general admission or a “commencement of proof in writing”,
would not be enough. Once the owner admits he authorized the extra,
however, the proof as to value can be made according to the ordinary
rules of law.
In Eastern Constructors Ltd v. City of Montreal ‘6 the contractor
encountered soil conditions different from those described in the
plans and specifications. ie did considerable extra work and claimed
an increase in price. The court said he should have stopped work
as soon as he found the new soil condition, notified the owner and
obtained written authorization before proceeding, or asked to have
the contract set aside on grounds of error. Not having done so, he
was subject to 1690 C.C. –
no extra.-
In La Cie de Construction et de Bois de Ste-Agathe v. Dame Lam-
bert,s it was held that errors in calculation by the contractor do not
justify any increase in the contract price.
In practice, changes and extras are often authorized by the ar-
chitect in issuing a “change-order” or certificate, and this would be
binding on the owner as long as the architect has general or specific
authority from the owner for this purpose.0
As to the position of sub-contractors under Article 1690 C.C.,
there are several cases which have held that the requirement of a
writing for extras does not apply to extras ordered by the general
contractor from a sub-contractor, that both parties here are com-
mergants who know the trade and that the general contractor is
not entitled to the same protection as an owner. 0 But what happens
if the relations between contractor and sub-contractor affect the
owner ? In Gravel v. Diana Construction 1 the general contractor
had verbally authorized a sub-contractor to do certain extras. The
sub-contractor registered a privilege for the amount of these extras
against the owners’ property, and the court held that 1690 C.C.
applied to sub-contractors as well in this case; otherwise the owner
[19481 B.R. 292.
6 (1936) 74 C.S. 196.
, See also Paradis v. The King [1942] S.C.R. 10, although in this case, the
court decided not on the basis of Article 1690 C.C. but on a specific clause in the
contract which imposed an obligation on the contractor to investigate soil condi-
tions.
s (1919) 56 C.S. 239.
P Bayard v. Drouin (1902) 22 C.S. 420.
10 Bouchard v. Lorion (1938) 44 R.L.n.s. 325; Mackay v. Davy
(19:30) 36
R.L.n.s. 140.
11 [1961] C.S. 476.
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LITIGATION POINTS IN CONST. CONTRACTS
197
would lose all his protection. The contractor could have all of the
work performed by sub-contractors and prove unauthorized extras
this way that ordinarily would not be admitted.
Payment of Price – Malfa~ons
What remedies are open to the owner where the contractor has
not done the work according to his contract ? Can he refuse to pay
the price ? Here is another great area of litigation and several dis-
tinctions must be made. Often these are very fine distinctions and
sometimes their practical application has been confusing. In essence,
the contractor’s right to demand payment and the nature of the
procedure he must adopt will depend on whether the work has been
substantially completed.
It is a general principle in the law of contracts that a party can-
not demand performance by the other party unless he has fulfilled
his own obligations. The owner is entitled to withhold payment and
the contractor cannot demand payment until the work has been sub-
stantially completed. Moreover, as long as there is a contract bet-
ween the parties, the contractor cannot simply claim on a quantum
meruit basis or on an unjustified enrichment basis. Since there is
a contract, the contractor must show that he has fulfilled his own
obligations thereunder.
In Verona Construction Ltd. v. Frank Ross Construction 12 a sub-
contractor abandoned the work because he had encountered quick-
sand and the general contractor was not willing to agree to an
increase in price. He then sued for the balance of price for work
he had done and the owner counter-claimed for damages because
of the abandonment. The Supreme Court found that the abandon-
ment was not justified and held that since he had not completed
his contract he could not ask for any payment.
Similarly, in Bertheau v. Gagnon,13 the court found that the work
had been done so badly that the owner had to redo a great deal of
it and the owner was justified in refusing payment. The contractor
had not substantially fulfilled his own obligations and this was a
good defense to the action. There was no need for cross demand. 4
On the other hand, there are many instances where the con-
tractor has substantially completed the contract, but there may
remain certain “malfagons” or minor items to complete or repair. In
these cases, the contractor is entitled to claim payment and if the
12 [1961] S.C.R. 195.
13 [1959] B.R. 473.
14 See also Anctil V. Cgt6 [1950] C.S. 461.
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owner has any claims for “malfagons”, he must assert these not by
defense but by cross demand so that he can have them liquidated.
The distinction between “malfagons” and inexecution of a con-
tract was made as follows by Mr. Justice Letourneau in the case of
Morissette V. Beaudette :15
“Cet appel nous met d’abord en presence de la distinction qu’il convient de
faire entre une malfagon et l’inexcution …
I1 me parait certain que dans un cas de contrat h forfait, l’entrepreneur ne
peut en principe 6tre pay6 que s’il a substantiellement ex6cut6 son contrat
et chacun des items de son contrat: non adimpleti contractus. Par contre, s’il
est prima facie 6tabli, par acceptation ou autrement, que les travaux ont
6t6 compldt6s, le droit A la cr6ance existe, sauf pour le d6biteur a faire valoir
des deductions A raison de malfagon ou un remboursement quant i des rfec-
tions; si le constructeur n’a pas compl~t6 substantiellement son ouvrage, il
ne peut pr6tendre A son paiement et c’est par d6fense qu’il faut lui opposer
ce moyen; mais si, ayant compl6t6 substantiellement son ouvrage, d’apr~s
une preuve prima facie suffisante, il se trouve que le propri6taire veut r6-
clamer pour malfagons ou r~fections, c’est A ]a demande reconventionnelle
que ce dernier devra recourir.”
In the Morissette case, the contractor was claiming a balance
of price of $1,950.00 due under a contract for construction of a
house which he alleged had been completed, occupied and accepted
by the Defendant. The owner contested the action by defense, claim-
ing that the balance was not due in that certain work had yet to be
completed. For this type of situation the court held that a defense
was not the proper remedy and that any such claims by the owner
would have to be asserted by cross demand. 1
The new Code of Procedure will probably simplify the problem
considerably in doing away with the necessity for a cross-demand
in these cases. But until then, the general rule is that as long as
the contract has been substantially completed or the work accepted –
any claim for “malfagons” must be made by cross-demand. The usual
procedure for the owner is to put the contractor in default to do the
repairs and if these are not done, he has the work done by another.
Then when he is sued for the balance of price, he claims the cost
of repairs by cross demand, and asks for compensation against the
price claimed by the contractor.
“Acceptance” of the work by the owner normally means that the
work has been substantially completed and the contractor can claim
his price. It may also mean that the owner has acquiesced in the
15 (1928) 45 B.R. 73 at 79.
16 See also Laplante v. Hamelin [1957] B.R. 417; Chouinard v. Best-Ever Foot-
wear [1961] C.S. 641; Duelz v. Kajandi [1960] C.S. 89.
LITIGATION POINTS IN CONST. CONTRACTS
No. 3]
199
“malfagons” and will not be able to complain about them.17 Acceptance
may be express or tacit. In Lebel v. St-Georges 18 the owner had
watched the work throughout and was well aware that the contrac-
tor had deviated from the plans in the floor level. He could not later
complain of this as a “malfagon”. But the mere fact of taking pos-
session of the building by the owner or his making payment under
the contract does not always mean he has accepted, particularly
where the defects are not readily apparent.19
Cancellation of Contract
Article 1691 C.C. provides another exception to the general law
of contracts. Normally, of course, a contract cannot be cancelled
without the consent of both sides; but under Article 1691 C.C., the
owner has the unilateral right to cancel a fixed price building con-
tract at any time, even after the work has begun, on indemnifying
the contractor for all his labour and expenses and paying damages
according to the circumstances.
The right of the owner to cancel is quite clear under Article
1691 C.C., and it is equally clear that contractor must be paid all
of his expenses for labour and materials. The question of -what dam-
ages or loss of profits the contractor can claim has been somewhat
less clear, however. In Tremblay v. Charest 20 after cancellation of
the contract, the contractor simply claimed the price under the con-
tract, offering to complete same but made no proof of expenses or
damages. His action was dismissed.
In Tidewater Shipbuilders v. Naphtes Transport,21 the Supreme
Court held that the right of the contractor to be paid expenses of
labour and material was absolute, but his right to damages would
depend on the circumstances of each case. The contractor is not en-
titled to payment as if the contract had been executed and he can-
not claim the profits he would have obtained had the contract not
been cancelled. He should be able to claim any profits which he lost
on other contracts because of taking this job.22
17Enond v. Saad (1927) 65 C.S. 188.
Is [1961] C.S. 66.
19 For a more detailed study of “acceptance” see Walter Johnson, The Redhibi-
Implications of acceptance of work (1952) 12 R. du
tory action and buildings –
B. 322.
20 [1963] C.S. 587.
21 [1927] S.C.R. 20.
22 Au laire v. Brownsburg [1946] B.R. 466 is to the same effect. It also deals
with an interesting question as to whether an accepted tender constitutes a
contract.
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In Gauthier V. St. Laurent,23 it was held that a contractor could
claim no loss of profits where the contract was cancelled before the
work was started, where he had incurred no expenses, had not missed
any other contracts and had not tried to get any other work since
cancellation.
Article 1691 C.C. gives the owner the right to cancel, but this
article does not apply as between the general contractor and sub-
contractor,24 and here cancellation requires mutual consent. There-
fore, the subcontractor should be able to claim not only his expenses
but all profits he would have made had the contract not been can-
celled. Presumably these would be reimbursed to the general con-
tractor by the owner.
Article 1691 C.C. does apply to architects as well as builders,
however. In H6pital St. Luc v. Beauchamp 25 the architect had been
retained to prepare plans and supervise work. After only part of
his work was completed, the hospital cancelled and retained another
architect. He was awarded damages equivalent to the fee according
to tariff on the completed work and something for the balance of
the work as well.
Finally, a clause in the contract allowing the owner to cancel
with no indemnity at all is legal and not contrary to public order.20
Risk and Insurance
As to the risk of loss or damage by fire or otherwise during
construction, Articles 1684, 1685 and 1686 C.C. cover this contin-
gency. Generally, if the contractor furnishes labour and materials
at a fixed price, the loss of the thing in any manner whatsoever
before delivery falls upon the contractor, unless the loss has been
caused by the fault or default of the owner. If the contractor fur-
nishes labour only, unless he is proved to be at fault, the loss falls
upon the owner, but the contractor is not entitled to claim his
wages.
It is certainly very important that proper arrangements be made
under the contract for insurance during construction. In Commis-
saires d’Ecole de St-Eugene v. Baloise Fire Insurance,27 the owners
and the contractors had each taken out separate policies, covering
the building under construction. When a fire occurred, the owners
23 [19581 B.R. 114.
24Pelisson v. Desrochers [1958] C.S. 289.
23 [1950] S.C.R. 3.
26 Cambrai Construction Inc. v. Hospital St. Ambroise [1963] S.C.R. 391.
27 [1944] C.S. 19.
No. 3] LITIGATION POINTS IN CONST. CONTRACTS
201
tried to recover under their own policy. The court held that the
owners had no insurable interest because, until the completion and
delivery of the building, the construction belonged to the contractor
and any loss fell on him.
Most contracts require the contractor to maintain a satisfactory
policy with loss payable to the owner and contractor “as their in-
terests may appear”.
Arbitration Clauses
Most contracts contain a clause to the effect that any disputes
between the contractor and the owner or architect shall be settled
by arbitration without recourse to the courts.
It is well known, of course, that such clauses can be of very
doubtful validity and that if the clause constitutes a “clause com-
promissoire”, it will not be enforced by the courts. The test of its
validity seems to be whether or not the clause deprives the parties
of their recourse to courts. Most of the clauses this author has seen
in the standard contract are probably invalid.
On the other hand, if properly framed such clauses can be made
to have some effect. In Boisvert v. Plante 28 the clause was to the
effect that before any party took his dispute to court, he agreed to
submit to arbitration. This did not deprive the parties of their right
to go to court; arbitration was merely a condition precedent to the
right of action and the clause was held valid. Since the action was
taken without fulfilling this condition, it was held to be premature
and dismissed.
Cost Plus Contracts: Keeping Records
Finally, a word on a very obvious but very important aspect of
cost-plus contracts. Since the contractor here is paid on the basis
of the actual cost of his labour and materials, he has a fiduciary
obligation to keep full, detailed and accurate records of his costs.
For materials, he must be able to show the actual cost of all mate-
rials used on the job. For labour, he must have detailed time records
of all time spent and work done. Estimates are not enough. 29
28 [1952] B.R. 471.
29 Fecteau v. Benn [1958] B.R. 706; Montreal Locomotive Works v. Black
Clawson, S.C.M. 451,399, now in appeal.
