In the recent decision of Highridge Homes Ltd. v de Boer, 2023 BCCA 74, the British Columbia Court of Appeal (“BCCA”) granted an appeal on the issue of accruing interest, finding that funds which had been paid into trust as security for a builder’s lien did not constitute a payment under the parties’ contract (the “Building Contract”) so as to satisfy the homeowner’s payment obligations or end the accumulation of contractual interest.
In addition, the BCCA dismissed a cross-appeal, finding that the incorporation of a cost-estimate sheet into the Building Contract was not sufficient in the circumstances to alter the allocation of the risk of cost overruns to the owner, under the cost-plus Building Contract.
Background
The Appellant, Highridge Homes Ltd. (the “Contractor”), was retained by Vanessa and Dirk de Boer (the “Owners”) to build a home in Vernon, B.C. The Building Contract was a cost-plus contract which, by its very nature, allocated the risk of cost-overruns to the Owners. However, the Building Contract also incorporated a cost-estimate sheet, a two-page document which listed the various components of the project and the estimated cost for each (the “Cost-Estimate Sheet”).
The parties had a falling out and terminated the Building Contract prior to completion. The Contractor issued its final invoice for services performed prior to the termination (the “Invoice”), which the Owners refused to pay.
The Contractor sued for payment and loss of profits, and filed a builder’s lien against title to the property. The parties entered into an agreement (the “Security Agreement”), whereby the Owners agreed to pay the principal amount of the Invoice to their lawyer, to be held in trust pending resolution of the dispute, in exchange for discharge of the builder’s lien (the “Trust Payment”).
The trial judge found that the parties had mutually terminated the Building Contract and that the Contractor was entitled to payment for the Invoice. However, the trial judge declined to award contractual interest (12% per annum) following the Trust Payment. The trial judge found that Trust Payment constituted payment under the Building Contract and was sufficient to end the accumulation of interest.
The trial judge also found that incorporation of the Cost-Estimate Sheet into the Building Contract was not sufficient, in the circumstances, to alter the allocation of risk of cost-overruns to the Owners under the Building Contract, as the Building Contract was, as its heart, a cost-plus contract. In doing so, the trial judge considered, but ultimately distinguished, the decision in Patel v WG Housing Ltd. (Patel), 2012 ABQB 734, in which an estimate was found to alter the terms of the contract such that any price changes had to be within plus or minus 5% of the estimated costs.
The Contractor appealed the trial judge’s ruling with respect to interest. The Owners cross-appealed on other issues, including the trial judge’s finding with respect to the Cost-Estimate Sheet, alleging that trial judge erred by failing to adhere to Patel v WG.
Payment into trust to discharge lien not payment under the building contract
The BCCA found that the Trust Payment did not satisfy the payment conditions under the Building Contract. Further, the Court found that the Owners had not relinquished ownership or entitlement to the Trust Payment, but rather that the Trust Payment was merely a substitution for the lands and premises against which the builders’ lien had been registered. Accordingly, the BCCA confirmed that the Trust Payment, like a payment into court to discharge a builder’s lien, did not constitute payment to the Contractor.
Cost-estimate sheet did not alter allocation of risk
The BCCA found no error in law in the trial judge’s interpretation of the Building Contract or consideration of Patel v WG, and upheld the trial judge’s decision. In doing so, the BCCA confirmed that the trial judge was not bound by Patel v WG and, further, that the determination of whether the risk-allocation under a cost-plus contract has been amended by the parties is fact specific.
Conclusion and takeaways
It is clear from Highridge Homes Ltd. that, like payments into court to discharge a builder’s lien, payments held in trust as security for a builder’s lien are not sufficient to discharge a party’s obligation to pay contractual interest.
While items such as interest may seem like a small issue, they can have a big impact, particularly where the underlying contract awards a high interest rate and the matter takes years to resolve. In Highridge Homes Ltd., for example, the Contractor was awarded interest at a rate of 12% per annum for a period of 56 months. A significant increase from the 2 month period sought by the Owners.
In this respect, the decision is a reminder in all jurisdictions that initial steps in an action, such as securing the removal of a lien, should be undertaken thoughtfully for the intended purpose by documenting the agreement at the time. This can occur by way of settlement agreements, trust conditions or the terms of the Court Order.
Highridge Homes Ltd. also serves as a reminder that incorporation of an estimate into a construction contract will not, on its own, be sufficient to shift the responsibility for cost-overruns away from owners under cost-plus contracts. Read together, Highridge Homes Ltd. and Patel v WG suggest that something more is required. In Patel v WG for example, the Court relied upon the stringent process for approving extras before they were constructed and deemed to increase the total cost, as well as extrinsic evidence of the owner’s reliance upon the estimate, which was lower then the original quoted price, when entering into the contract. Parties to cost plus contract containing estimates should be careful to craft their contracts at the outset in such a manner that accurately reflects the parties’ intended allocation of risk.
For more information regarding builder’s liens, security for builder’s liens, cost-plus contracts and the allocation of risk thereunder, or any other matter, please contact a member of our Construction Litigation Group.
