decisions, decisions – faced with non-payment, contractors must pursue the right claim and remedy
Contractors providing their services and materials to construction projects in exchange for instalment payments must carefully consider their options when payments are missed. If one or more payments are missed, the contractor must make the often difficult choice as to whether it will walk off the project. If the contractor walks off the project and sues the owner for non-payment, the contractor must then make another important choice – whether to pursue lost profits through a breach of contract claim or the value of the work performed to date through a quantum meruit claim. As illustrated by the recent Ontario Court of Appeal decision in Landmark II Inc v 1535709 Ontario Limited,1 this decision can significantly impact the amount a contractor can recover.
In Landmark II, the plaintiff was a landscaping and excavation contractor that entered into a contract with the owner to expand a parking lot. Under the contract, the contractor was to be paid $58,500 in four instalments, with each instalment payment being triggered by a construction milestone. When the contractor sought its second instalment payment, the owner refused to pay and the contractor walked off the job.
a contractor's choices when faced with non-payment
In circumstances like Landmark II, where the owner has failed to make payment as promised, the contractor has two primary choices:
- Whether the contractor will walk off the job. If the contractor walks off the job, the contractor has treated the contract at an end as it is generally entitled to do. The parties are relieved of their obligations going forward and the owner is liable to the contractor for damages. Conversely, the contractor may continue to work in the hope of eventual payment. As the choice between treating the contract at an end and continuing to work is a choice between "inconsistent rights," the choice must be made immediately. The two options cannot co-exist.2
- Whether the basis of the contractor's claim will be for breach of contract or quantum meruit. This choice impacts the manner in which damages are calculated. Damages for breach of contract are often forward looking (i.e., what would the contractor have made if the contract was completed?), while recovery on a quantum meruit basis is backward looking (i.e., what was the value of the work done?). This is a choice between alternative remedies, rather than necessarily inconsistent rights. As a result, this choice can be made as late as trial, if properly framed and pursued in the contractor's claim.
The nature of this second decision can substantially impact the amount of recovery available to a contractor. If the contractor elects to proceed with a breach of contract claim, the contractor will be bound by the terms of the contract – whether good or bad. If the contractor chooses to proceed on a quantum meruit basis, then the terms of the contract are discarded, and any award will be based on an assessment of the value of the work completed.
The opportunity to discard the contract is a result of the contractor treating the contract at an end due to the owner's non-payment. It is important to note that contractors that complete the contract, even in the face of non-payment, are generally precluded from pursuing quantum meruit. This preclusion occurs because the contract is never terminated or brought to an end – the contract's terms remain in force.
practical considerations when choosing your remedy
The practical impact of choosing the remedy will depend on the facts of each case. For example, the following factors can substantially impact the analysis as to which remedy is most advantageous to the contractor:
- How beneficial was the stipulated contract price for the work completed? Under a quantum meruit analysis, the stipulated contract price is no longer binding (although it may be relevant to valuing the work). As a result, if the contract price for the completed work is less than the value of that work (e.g., if the contractor had underbid the project due to competitive pressures), then a quantum meruit approach may be more valuable, and vice versa.
- At what stage was the contract terminated? Lost profits for remaining work are not available in a quantum meruit claim, but are available in a breach of contract claim. If the project was terminated early, the value of the lost profit claim may exceed the claim for completed work. A breach of contract claim would then be more valuable.
- How difficult will a judgment be to collect from the owner? A lien can only be registered under the Construction Lien Act for services or materials that have actually been supplied on a job. As a result, a claim for contractual damages for lost profits cannot be secured by a lien. In some circumstances, a lesser, but secured, claim for quantum meruit may be more valuable than a larger, but partially unsecured, claim for breach of contract.
- Is an interest rate stipulated in the contract? If a quantum meruit election is made, a contractor may lose the benefit of any contractual provision for interest on unpaid amounts. If the contractual interest rate is substantially higher than the pre-judgment and post-judgment interest rates under the Courts of Justice Act,3 then a breach of contract claim may be more valuable in the long run.
The Landmark II case demonstrates how the distinction between the two remedies translates into money. In Landmark II, on the date the contractor left the project it had completed $29,425 worth of work (half of which had been previously paid), under the terms of the contract. It took the position, however, that the value of this work was actually $43,875. It therefore sought recovery on a quantum meruit basis.
Unfortunately for the contractor, the trial judge disagreed with its position as to the value of its work. Based on the evidence of the contractor hired by the owner to complete the work commenced by the plaintiff, the trial judge held that the value of the work was only $16,000. As the contractor had been paid $14,712.50 already on the first instalment payment, this left only $1,287.50 outstanding. After setting off a $5,146.39 liability by the contractor to the owner, this left the contractor liable to the owner for approximately $3,000. The Court of Appeal upheld this determination.
Had the contractor pursued available remedies for breach of contract, it is possible that it could have recovered much more than $1,287.50. In addition to the $14,712.50 which remained owing under the terms of the contract, the contractor took the position that it had lost at least $24,500 in profit that it would have earned had the contract been completed. However, since the contractor had only made a quantum meruit claim, the Court of Appeal ruled that it was not able to pursue remedies for breach of contract and claim for lost profits.
lesson learned – ensure that all options are available
Ultimately, the Court of Appeal's decision in Landmark II teaches contractors at least one important practical lesson – contractors that only pursue one remedy may be stuck with that choice at trial, even where that decision has turned sour. As the choice between quantum meruit and breach of contract does not need to be made until trial, ensure that both alternatives are pursued from the outset where possible to better protect your rights and available remedies.
by Jason J. Annibale and Mark Wiffen
1 2011 ONCA 567 ["Landmark II"].
2 GNC Realty Products Ltd v Welglen Ltd,  OJ No 3456 (HCJ) at para 59, citing Morrison-Knudsen Co Inc. v British Columbia Hydro & Power Authority, (1978) 85 DLR (3d) 186 (BCCA).
3 RSO 1990, c C 43.
For more information on this topic, please contact:
Toronto Jason J. Annibale 416.865.7912 firstname.lastname@example.org
a cautionary note
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2011