Can A Change To A Construction Contract Be Set Aside For Duress Or Coercion?

Building projects often give rise to heated discussions. When a change order is made in that sort of situation, can one party later say that the change order was made under duress or coercion? The Newfoundland Court of Appeal said Yes in the recent decision in Hickey’s Building Supplies Ltd. v. Sheppard.

Background Facts

This decision was reviewed in the last article June 7, 2015. To refresh our memories the facts were as follows:

Mr. and Mrs. Sheppard hired Hickey’s to build them a retirement home. Mrs. Sheppard suffered from a type of sensory neuropathy that meant that she had no sensation from her elbows to her hands and below her knees, and both feet were amputated. She moves on two prosthetic feet and a wheelchair. Hickey’s understood that the home was being constructed to suit Mrs. Sheppard’s requirements. The construction of the home was more than a year late. When constructed, the flooring was not level and there was a quarter inch difference in height between the ceramic tile flooring in the kitchen and the hardwood flooring in adjacent rooms. The flooring deficiencies were aesthetically objectionable and presented tripping hazards to able-bodied people, but especially to Mrs. Sheppard.

One of the issues in the case was whether the Sheppards had agreed to a change in the height of the ceiling from 9 feet to 8 feet. The contractor said that he had discussed the height of the ceiling with Mr. Sheppard who had agreed to the lower ceiling. The contractor submitted that the Sheppards had waived any requirement of 9-foot ceilings.

Mr. Sheppard said that when he met with the contractor, the meeting degenerated into shouting. Mr. Sheppard said that he agreed to the 8-foot ceilings because he could not countenance any further delays in the project. Mrs. Sheppard said that the contractor was adamant that “we’re not getting nine foot walls.”

Decision of the Court of Appeal

The Court of Appeal adopted the following definition of waiver:

“waiver…arises where one party to a contract, with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with a condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent and the acts or conduct of the person alleged to have so elected, and thereby waived that right, must be viewed objectively and must be unequivocal.”

The court then adopted the following test as to whether waiver had occurred:

“…a finding of economic duress is dependent initially on two conditions precedent:

(i) the contractual variation must be extracted by pressure in the form of a demand or threat;

(ii) the exercise of pressure must be such that the coerced party has no practical alternative but to comply with the demand or threat.

If these two conditions are met, the focus shifts to whether the party consented to the contract variation. The factors to be considered are (i) whether the promise was supported by consideration (ii) whether the coerced party protested the variation or executed it on a “without prejudice” basis and (iii) [if not,] whether the coerced party took steps to disavow the variation on a timely basis.”

Based on this test, the court concluded that:

“the evidence regarding the heated discussion between Mr. Sheppard and the Contractor leads to the conclusion that there was a demand amounting to pressure on Mr. Sheppard to agree to the eight-foot rather than nine-foot walls. In the circumstances, the Sheppards had no practical alternative but to accept this change. The change was not supported by any consideration from the Contractor. Finally, the Sheppards vehemently protested the variation.”

The Court of Appeal accordingly upheld the trial judge’s conclusion that the contractual requirement for 9-foot ceilings had not been waived by the owners.

Discussion

Parties to a building contract should remember that the negotiation for changes to some building contracts may be a fragile exercise, at least in some circumstances. One of the parties to the contract may be under a financial, emotional, physical or other handicap or impairment. That party may be the owner, but it also may be a supplier or subcontractor which is in a position of financial vulnerability. If that party has no real option but to acquiesce in the demand for a change in the contract, and if there is no consideration for that change, then the conduct of the party demanding the change may be later seen as over-bearing and coercive. If it is, then that conduct may be set aside and the change order, or waiver of the original contract, may be nullified.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 8, section 7(b)(ii)

Hickey’s Building Supplies Ltd. v. Sheppard (2014), 36 C.L.R. (4th) 15, 2014 CarswellNfld 353

Building contracts – change orders – waiver – duress and coercion – rescission

Thomas G. Heintzman O.C., Q.C., FCIArb                                                       June 15, 2015

www.heintzmanadr.com

Can General Damages Be Awarded For The Breach Of A Building Contract?

Generally speaking, damages for a non-financial loss are not awarded for the breach of a business contract. That is because those sorts of damages are not foreseeable. The breach of a business contract may give rise to anxiety and distress, but that result is usually thought of as part of the vicissitudes and rough and tumble of commerce.

But, according to the Supreme Court of Canada’s decision in Fidler v. Sun Life Assurance Co. of Canada [2006] 2 S.C.R. 3, non-financial losses for mental distress can be awarded in certain circumstances. . The court acknowledged that “a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration.” However, the court said that it “is otherwise….when the parties enter into a contract, an object of which is to secure a particular psychological benefit.” Accordingly, general damages for breach of contract may be awarded if that sort of damage was “in the reasonable contemplation of the parties at the time the contract was made,” and that will be the case if

(1) an object of the breached contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and

(2) the resulting degree of mental suffering was of a degree sufficient to warrant compensation.

Can a building contract satisfy those conditions and give rise to damages for mental distress? According to the recent majority decision of the Newfoundland Court of Appeal in Hickey’s Building Supplies Ltd. v. Sheppard, the answer to that question is Yes.

Background

Mr. and Mrs. Sheppard lived in Labrador City. They hired Hickey’s to build them a retirement home. Mrs. Sheppard suffered from a type of sensory neuropathy that meant that she had no sensation from her elbows to her hands and below her knees, and both feet were amputated. She moves on two prosthetic feet and a wheelchair. Hickey’s understood that the home was being constructed to suit Mrs. Sheppard’s requirements.

The construction of the home was more than a year late. When constructed, the flooring was not level and did not adhere to the under padding. Most importantly, there was a quarter inch difference in height between the ceramic tile flooring in the kitchen and the hardwood flooring in adjacent rooms. Hickey’s installed transition strips at this juncture but those strips interfered with Mrs. Sheppard’s wheel chair being able to run from one room to the other, causing the wheel chair to “bring up solid” against the transition strips. In addition, the strips cracked and splintered and the floorboards popped up from the floor. The flooring deficiencies were aesthetically objectionable and presented tripping hazards to able-bodied people, but especially to Mrs. Sheppard. The Sheppards counterclaimed against Hickey’s for general damages for mental distress as a result of these deficiencies.

The Courts’ Decisions

The trial judge awarded the Sheppards $15,000 non-pecuniary damages for mental distress. The trial judge held that the Sheppards had met the test in Fidler. The Newfoundland and Labrador Court of Appeal was divided on the issue. The majority agreed with the trial judge and upheld the general damage award. The dissenting judge held that the Fidler test had not been met and would have dismissed the claim for general damages.

The central issue was whether the contract contained a “peace of mind” component. The dissenting judge said No:

“Regardless of the Sheppards’ special circumstances with respect to wheelchair accessibility, the contract to build their house did not engage the “peace of mind” component that would ground the necessary foreseeability criterion related to securing a psychological benefit as referenced in Fidler. It is true that the hardwood flooring was not properly installed and that the Contractor chose to comply with National Building Code standards in using transition strips. However, these deficiencies could be corrected and damages awarded to address the required remediation. This was not a situation in which the house was rendered uninhabitable.

The majority came to the opposite conclusion:

“…Hickey’s concedes in its factum that the contract can fairly be characterized as a “peace of mind” contract, and does not allege that the trial judge made any factual or legal errors relating to foreseeability. Hickey’s “had actual knowledge of the plaintiff’s particular sensibilities”…

It is inherent in a home construction contract that the finished flooring will be hazard-free. The flooring Hickey’s delivered was far from hazard-free. Foreseeable mental distress may ensue for any home purchaser who did not receive this basic contractual promise, but is particularly foreseeable that mental distress would ensue in this case.

Accordingly, it was within the contemplation of the parties that the purpose of the contract was to provide the Sheppards, in a timely fashion, with a safe retirement home accommodating Mrs. Sheppard’s needs. Hickey’s did not deliver what they promised with respect to the flooring and delay in completion. It was therefore foreseeable that these breaches of the contract between the Sheppards and Hickey’s would cause mental distress to the Sheppards. Given the foreseeability of their mental distress, damages for it are recoverable if they are sufficient to warrant compensation.”

The court also concluded that the Shepards’ mental distress was “more than the ordinary annoyance, anxiety and fear arising from a bad building contract. In sum, the mental distress suffered by both Mr. and Mrs. Sheppard is serious, prolonged and far from trifling. It is sufficient to warrant compensation.”

Accordingly, the award of general damages for mental distress was upheld.

Discussion

The upshot of these decisions appears to be that contracts cannot be put into water-tight compartments so far as damages for mental distress are concerned. In each case, the nature of the contract and the circumstances of the parties to it must be examined to determine if mental distress is reasonably foreseeable.

The notion of “peace of mind” may be more suited to some contracts and to the circumstances of some parties to contracts. In some cases, perhaps, the very nature of the contract will tend to make it a “peace of mind” contract; such as a vacation contract, or disability or pension contract. Whether this decision is saying that a building contract for a home is a “peace of mind” contract depends on the way one reads this decision. Some of the language in the majority decision suggests that virtually any home building contract is for the “peace of mind” of the homeowner. The underlined words above suggest that foreseeable mental distress can arise from any improper construction of a home. On the other hand, the dissenting judge was clearly not of this view, and other language in the majority judgement suggests that it was only the particular disabilities of Mrs. Sheppard that made this building contract a “peace of mind” contract. It will be interesting to see which approach other courts in Canada follow.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., section 6(m)(i)(B).

Hickey’s Building Supplies Ltd. v. Sheppard, (2014), 36 C.L.R. (4th) 15, 2014 CarswellNfld 353,

Building contracts – general damages – damages for mental distress

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                     June 7, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

Quebec Court of Appeal Awards Impact Damages

When a breach of a building contract occurs, the damages can be extensive because the breach can have an impact on the performance of other parts of the contract. For this reason, a unique aspect of construction disputes is the potential award of what are called “impact” costs or damages.

In the recent decision of the Quebec Court of Appeal in Dawcolectric inc. c. Hydro-Québec, the court awarded impact damages against the owner, even though those damages had been suffered by the subcontractor. In the course of its judgment the Court of Appeal also addressed a number of other construction law issues.

Background

Hydro-Quebec contracted with a general contractor Dawco which granted a subcontract to a subcontractor Solimec which did most of the work on the project. Over 400 change orders were issued by the owner and substantial delays were encountered on the project. The general contractor brought a claim for damages against Hydro-Quebec. The trial judge found that the delays were caused 60 percent by Hydro-Quebec and 40 percent by the contractor. The trial judge found that the collective corporate conduct of Hydro-Quebec amounted to a breach of contract. The trial judge dismissed Dawco’s claim for the impact damages suffered by the subcontractor, Solimec.

Hydro-Quebec appealed on the grounds that it could only be liable for acts of its employees, and there was no such thing as a breach of contract by the corporation without a specific act of an employee amounting to a breach. The contractor appealed from the trial judge’s failure to award impact damages.

Decision of the Quebec Court of Appeal

The Court of Appeal upheld the trial judge’s finding that Hydro-Quebec had, by the collective conduct of its employees, breached the contract. It was not necessary to identify a specific breach of contract arising from an individual employee’s conduct for the court to conclude that, in totality, the owner had breached the contract.

The Court of Appeal held that the trial judge erred in failing to award Dawco the amount of impact damages that had been suffered by Solimec and included in Dawco’s claim.

First, while the contract between Dawco and Solimec was styled as an “Entente de rémunération du risqué” (or “risk reward contract”), nevertheless Solimec was a subcontractor of Dawco. Therefore, the general principle applied that the work done by Solimec was work done by Dawco for Hydro-Quebec and recoverable by Dawco under the main contract with Hydro-Quebec.

Second, the fact that the limitation period had expired for Solimec to claim those costs from Dawco was irrelevant and was not a defence for Hydro-Quebec to Dawco’s claim. The limitation period for Dawco’s claim against Hydro-Quebec had not expired when Dawco commenced its action. Therefore, Dawco could assert its claim to those costs against Hydro-Quebec, including any claim arising from the work done by Solimec.

Third, the costs in question were in fact and law “impact costs” and not “indirect costs” as contemplated by the change orders. Indirect costs are costs for items like site administration, bonding costs, water and electricity servicing costs, demobilization, etc. They are sometimes called general or project costs.

The costs in question here were the costs of: extra technical and supervisory personnel and additional equipment, over and above those that had been forecast for the work, which became necessary due to the delays and changes demanded by Hydro-Quebec. According to definitions accepted by the Court of Appeal, these costs fall within the concept of “impact costs,” being additional costs resulting from the impact of change order upon the performance of the contract. The Court of Appeal accepted that impact costs are normally the responsibility of the contractor, but they can become the responsibility of the owner when the owner by its conduct becomes liable for damages in a contractual or non-contractual claim.

When negotiating the change orders, Hydro-Quebec had insisted that the only amounts that could be included were costs directly arising from the modification of the work, and specifically excluded from the negotiations of the change orders any consideration of impact and the retarding of the project. In those circumstances, the Court of Appeal held that those costs were not included within the change orders and the change orders could not bar a claim for impact costs associated with those changes.

Accordingly, the Court of Appeal allowed Dawco’s claim for impact costs and awarded 60% of those costs to Dawco.

The Court of Appeal confirmed the trial judge’s award of 13.76% for overhead and profit. Dawco and Solimec led evidence to establish that their historic overhead and profit during the period 1999 to 2005 amounted to 13.76% of their costs. In addition, the contract itself referred to overhead and profit of 15% in another clause in the contract, which was not applicable to the present case. Hydro-Quebec pointed out that Solimec had only anticipated overhead and profit of 4.95%. Nevertheless, the court held that 13.76% was reasonable in the circumstances.

The Court of Appeal allowed in part the appeal by Hydro-Quebec. It set aside the award of additional financial costs allegedly incurred by Dawco. It held that Dawco was, after all, 40% responsible for the delays, and furthermore Dawco was by its decision receiving substantial compensation for its actual losses. After a lengthy review of the facts, the court held that Hydro-Quebec was not at fault such that Dawco’s additional financial costs should be the responsibility of Hydro-Quebec.

The Court of Appeal also allowed Hydro-Quebec’s appeal with respect to Dawco’s claim for damage to reputation, loss of the opportunity to obtain other business and other inconveniences. It pointed out that the trial judge had dismissed Dawco’s claim for punitive damages on the ground that Hydro-Quebec had not purposefully engaged in wrongful conduct. The court concluded that there was no proof of causation between these alleged losses and any wrongful conduct of Hydro-Quebec that had not already been properly compensated, and that these losses were uncertain and unforeseeable.

Discussion

This decision contains a potpourri of issues which are important for construction law. One of the most interesting is that of impact damages: what are impact damages; what sort of clause can eliminate a claim for impact damages; what sort of conduct and documentation during the issuance of change orders can eliminate a claim for impact damages, or allow it to survive?

In this case, the Court of Appeal of Quebec held that the contractor’s claim for impact damages was not excluded by the contract. Nor was that claim excluded by the change order process because the owner had specifically directed that impact costs were not to be included in the change order process. Accordingly, the claim for impact damage was allowable under the contract because they fell within a recognized category of recoverable damage, and the claim had not been nullified by the change order process.

The parties could have agreed to include impact costs in each change order, although the total impact costs arising from all change orders would have been difficult to assess when negotiating each change order. Hydro-Quebec could have taken the position that no impact costs arose from the change orders. In either case, Hydro-Quebec could have then required Dawco to sign a release for any further impact costs arising from the change order process. In those circumstances, Dawco’s claim for impact damages would not have survived. However, Dawco would presumably not have accepted that arrangement if it wished to preserve a claim for those costs, particularly one arising from the cumulative effect of change orders.

This decision shows the importance of the negotiation process and the wording of change orders to the viability of a later claim by the contractor for impact costs. Since those costs may arise from many change orders and usually cannot be determined from any single change order, the owner and contractor must be alive to the potential existence of those costs and how they are to be determined.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter, part 6(f)

Dawcolectric inc. c. Hydro-Québec (2014), 32 C.L.R. (4th) 183, 2014 CarswellQue 4600

Building contracts  – Damages  –  Impact Costs – Delays – Change Order Process

Thomas G. Heintzman O.C., Q.C., FCIArb                         June 1, 2015

www.heintzmanadr.com

www.constructionlawcanada.com