Lessons Learned
- Construction involves the unexpected, the unexpected leads to change orders, and unless all aspects of the contractual revision are clearly documented and signed off on by the affected parties, change orders lead to complex litigation.
- If you’re going to rely on the contractual rights granted to you by a counterparty’s default, you’d better issue a notice of default – and promptly.
- Be exceptionally careful what you put in your pleadings.
- Are your time sheets written on napkins and jobsite cardboard? Read on to find out why they shouldn’t be.
- Sing like nobody’s listening, dance like nobody’s watching, write emails like they’ll be used to determine the validity of a quarter-million-dollar invoice.
Construction
661 University Avenue is the site of the UHN Centre for Cell & Vector Production, a state-of-the-art biomedical laboratory complex located in downtown Toronto, adjacent to some of Canada’s leading hospitals and research institutes. The site is also now the subject of a 42-page judgment consequent to litigation arising from construction of the laboratory in 2019.
In January 2018, the general contractor subcontracted the project’s mechanical work to Geo A. Kelson Company Limited, which sub-subcontracted the project’s sheet metal work to A. Amar and Associates Ltd. for a fixed price of $782,000. Due to both a labour shortage in sheet-metal workers and Amar’s winning bids on five separate Kelson projects that – thanks to project delays – all unexpectedly proceeded around the same time, Amar hired sheet-metal labourers from Sjostrom Sheet Metal Ltd. to bolster its own workforce.
In July 2018, Sjostrom walked off the job following a payment dispute with Amar, at which point Kelson discovered both the unexpected hiring of Sjostrom and that Sjostrom’s sheet-metal workers were the only ones on site.
Sjostrom returned to work after Kelson’s executive vice-president promised that Kelson would make all payments to Sjostrom directly going forward, bypassing Amar. Kelson then issued a “Sub-Contract Change Order” reducing the value of Amar’s fixed subcontract by approximately $62,000.
Litigation
A stitch in time usually saves nine, but in this case the stitch didn’t hold. Two related disputes eventually arose as a result of Kelson’s improvised solution to the crisis of Sjostrom walking off the job.
First, Sjostrom claimed that Kelson owed it $161,000 for several thousand hours of unpaid work. The parties disagreed about both the facts (how many hours did Sjostrom’s labourers actually work?) and the nature of Sjostrom’s contract with Kelson, including details like payment structure and whether the contract actually existed.
A second, related dispute subsequently arose between Kelson and Amar regarding who breached the initial subcontract, and whether the change order removed all sheet metal work from Amar’s scope of work. Amar was called back to site to perform sheet-metal work in late September, and if the sheet metal work had been removed from scope, that winter work would be a valid extra. If not, Amar would be eating the additional $200,000 cost of services and materials as part of its fixed-price agreement to provide all sheet-metal work on the project.
Analysis
Agreement Between Kelson and Sjostrom
The Court began with the question of whether Kelson and Sjostrom had formed a direct contract, or whether Sjostrom remained a subcontractor to Amar whom Kelson only paid on Amar’s behalf out of Amar’s subcontract funds.
The lack of a written agreement between Kelson and Amar would normally have proved to be a much greater headache, requiring evidence of a meeting of the minds on the three essential terms of a construction contract: price, scope of work, and a schedule or completion date. In this case, however, the Court found that Kelson had inadvertently admitted to the existence of a direct contract with Amar in its statement of defence, where it wrote that it “decided to retain [Sjostrom] to complete Amar’s Work directly”, that it “entered into an agreement with [Sjostrom] for [Sjostrom] to complete Amar’s Work”, and that it was “forced to re-hire Amar to perform [Sjostrom’s] scope of work”.
The Court also relied on subrule 25.07(3) of the Rules of Civil Procedure, which expressly requires a party who intends to prove a version of facts different from that pleaded by the opposite party to plead the party’s own version of the facts in the defence. Here, Kelson’s plead version of the facts did not contradict Sjostrom’s plead assertion of a direct contract.
Finally, the Court noticed that Kelson had employed s. 17(3) of the Construction Act in its pleadings, which allows a party directly liable for payment to claim a set-off against it. This, of course, would only be relevant if Kelson believed itself to have privity of contract with Sjostrom.
The Value of Sjostrom’s Work
Unfortunately for Sjostrom, it won the battle but lost the war. The Court found that Sjostrom and Kelson had agreed to an hourly rate for completion of the work, but Sjostrom’s evidence of the hours its labourers had actually worked was a mess.
Sjostrom amalgamated the overtime hours with regular hours rather than bill them as separate line items, and only tendered weekly time summaries in support of the invoices that were generated by Sjostrom’s principal, unsigned by the labourers involved, and lacking details of the work actually performed each week. When questioned about whether actual time sheets existed that had been generated by the labourers themselves, Sjostrom’s principal admitted that the labourers didn’t keep time sheets, only notes recorded on scrap drywall, jobsite cardboard, and napkins.
The final nail in the coffin was that the weekly time summaries prepared by Sjostrom’s principal were not actually transmitted to Kelson weekly, but rather en masse with each invoice, making it impossible for Kelson to monitor how much time Sjostrom labourers had spent on site or what they were accomplishing.
The Court emphasized the precedent that time spent by labourers on a project must be strictly proved given the difficulty of verifying it after the fact. Without any evidence worthy of the word of what Sjostrom had accomplished on site, its demand for compensation for $160,000 of unpaid labour was dismissed.
The Change Order
Kelson was not yet out of the woods, however. The Court’s finding of a direct contract between Kelson and Sjostrom did not answer the question of whether sheet-metal had been removed from Amar’s scope of work by the change order, or whether it merely established a credit for the work for which Kelson had paid Sjostrom.
The change order in question is a monument to ambiguity, only stating a unit price deduction and the description “work performed by others”. The Court essentially disregarded it and went looking for answers in the documentary evidence near in time to the creation of the change order, especially emails, and in the conduct of the parties after the fact.
The Court observed that the labour rate agreed between Kelson and Sjostrom had not been discussed with Amar, which the Court found “curious” if Sjostrom was still presumed to be Amar’s subcontractor. The Court also found an email from Sjostrom’s principal to Amar’s principal stating that henceforth Sjostrom would be exclusively following Kelson’s instructions and their time sheet submittal policy, and a second email exchange in which Kelson neglected to dispute Amar’s statement that the $60,000 unit price deduction in the change order represented the cost to complete the sheet metal work as contracted.
The Court had no difficulty finding that the change order removed the remaining sheet metal work from scope of Amar’s contract.
This finding would prove to cause Kelson a great deal of pain on the subject of whether it owed Amar approximately $209,000 for sheet-metal work it asked Amar to come back on site to complete that winter after Sjostrom’s dispute with Kelson began to escalate.
Kelson attempted to argue that it had only needed to employ Sjostrom in the first place because Amar had breached its contractual obligation to have sufficient manpower on site, and that it was therefore still Amar’s responsibility to finish the sheet-metal work at its own expense. Problem: all of Kelson’s rights on default flowed from the existence of a notice of default, and in the initial chaos surrounding all of Sjostrom’s sheet-metal labourers walking off site, Kelson had not bothered to issue Amar with a notice of default.
Without issuing that notice, Kelson had no right beyond the agreed value of the change order, which was $60,000, to back charge Amar for the cost of Kelson directly contracting with Sjostrom. Whether or not Amar underbid the job became, in the Court’s words, “immaterial to disposition of this trial”. Amar completed its revised scope of work in exchange for its revised fix-price payment, and when it was called back onto the site to perform work outside that revised scope of work, that additional work constituted a valid extra.
When the smoke cleared, Sjostrom came away empty-handed and Amar with a judgment against Kelson for $209,737.88 plus costs.