Sometimes circumstances change, and one party attempts to cancel or otherwise get out of a contract for a construction project. The other party may claim that this action is a breach of contract, leading to a dispute.
This article examines whether it is possible to cancel construction contracts. We also take a look at a recent decision of the Court of Appeal for British Columbia in which a builder sued a purchaser after the purchaser notified that it was cancelling a contract for the construction of a duplex in West Vancouver after its financing fell through.
When might a party seek to cancel a construction contract?
There are many reasons why a party might seek to cancel a contract for a construction project. As noted above, the purchaser may be unable to obtain financing or they may change their mind after finding a lower-cost building option.
The builder may be unable to secure the relevant building permits, or may be unable to commence construction for some other reason, such as an inability to secure materials or labour. The reason could be within or beyond their control.
Is it possible to cancel a construction contract?
The specific terms of the contract are important in determining whether there is a right to cancel. Some contracts may include a cancellation clause, laying down the circumstances in which the parties are entitled to terminate the contract and setting out the consequences of doing so. However, some contracts do not include a cancellation clause. If a cancellation clause is not included and one of the parties does not comply with the terms o the contract, the other party may commence an action for breach of contract. The possible remedies will depend on the circumstances, but most often, will be the payment of damages to compensate for the financial loss suffered.
Purchaser signed a contract for construction of duplex house
In Firestar Custom Home Builders Inc. v 1099000 B.C. Ltd., a company engaged a builder to provide designs and obtain a building permit for the construction of a duplex in West Vancouver. The purchasing company obtained a construction loan that would be drawn down by progress draws as the project progressed.
The building permit was approved three years later, and the purchaser and builder entered into a standard form contract in October 2019 to construct the duplex. It contained the following cancellation clause:
“The Builder and Purchaser agree that if the Builder is not able to commence construction within a period of sixty (60) days from the date of this Agreement due to causes beyond his reasonable control, such as inability to obtain a building permit, failure of Purchasers to qualify for a mortgage (if a condition of this Agreement), or failure to comply with provincial or municipal statutes, then the Builder or the Purchasers may cancel this Agreement on written notice mailed to or delivered to the address of the other party shown on this Agreement. The Builder’s liability to the Purchasers shall be limited to the refund of any monies paid by the Purchasers to the Builder less any costs reasonably incurred by the Builder on account of this Agreement.”
Purchaser sought to cancel the construction contract
Due to the delay with the permit, the lender required a further appraisal and later refused to provide financing. In December 2019, the purchaser informed the builder that it had no financing and could not proceed with construction. In January 2020, the purchaser’s lawyer wrote to the builder’s lawyer advising that the purchaser was cancelling the contract because the builder had not commenced construction within 60 days of the contract and that it was unable to obtain financing.
The shares in the purchaser company were sold to new owners, who started construction without the builder’s involvement. The builder commenced an action for breach of contract and the duty of good faith. It sought damages for loss of profit on the project.
Court found purchaser was entitled to rely on the cancellation clause
The summary trial judge determined that, since the builder had not been able to commence construction within 60 days from the date of the agreement due to circumstances beyond its control, specifically the purchaser being unable to obtain financing, the purchaser was entitled to rely on the cancellation clause. The contract was cancelled when the purchaser’s lawyer wrote to the builder’s lawyer.
On appeal, the builder’s new arguments were rejected
The builder attempted to raise new arguments on appeal, in particular, that the contract could not be cancelled by a purchaser due to its inability to obtain a mortgage where qualification for a mortgage was not a condition or term of the contract.
The Court of Appeal refused permission to raise this new issue on appeal, explaining that the evidentiary record was not complete. The Court noted that the standard form contract stated that there was nowhere on the form to indicate whether mortgage financing was a condition of the agreement. In addition, the parties tacitly assumed that failure to qualify for financing was a condition of the contract when it was cancelled.
Builder not entitled to lost profits
The builder argued that the cancellation of the contract did not preclude it from claiming lost profits. It relied on a default clause in the contract that provided if payment of any amount was not made, the builder may treat the contract as repudiated and recover payment for work completed plus damages, including loss of profit.
The Court of Appeal agreed with the summary trial judge in rejecting this claim. It decided that this clause was not applicable as the purchaser did not repudiate the contract. It effectively cancelled the contract under the cancellation clause.
The construction lawyers at Meridian Law Group not only have a deep understanding of construction law in British Columbia, but they recognize that unresolved issues threaten the completion of projects, harm business relationships and tarnish reputations. We deliver results in all types of construction disputes at all stages of the process, whether through negotiation or timely legal action.
Located in downtown Vancouver, Meridian Law Group represents clients in Vancouver and throughout British Columbia, including West Vancouver, North Vancouver, Coquitlam, Penticton, Kelowna, Richmond, New Westminster, Burnaby, Surrey, Langley, and White Rock. To arrange a confidential consultation, please call (604) 687-2277 or fill out the online form.