Contracts Should be a Living Thing: When Parties Fail to Negotiate Future Terms

Even well-constructed contracts cannot cover every eventuality. To do so would require contracts to be unreasonably lengthy, nearly impossible to interpret, parties would be arrested in their day-to-day dealings by overly prescriptive terms and contracting parties would not have reasonable flexibility to deal with unforeseen and changing circumstances as they are encountered. Instead, good contracts often provide frameworks and formulas by which parties are expected to negotiate and contractually resolve future issues and eventualities. Unfortunately, this prudent contractual flexibility still can leave disputes on interpretation and application of set frameworks and formulas, as was the case in the recent decision of Bollhorn v Lakehouse Custom Homes Ltd., 2022 BCSC 2120 (CanLII).

In Bollhorn v Lakehouse Custom Homes Ltd the plaintiff landowner had contracted with the defendant vendor/builder to purchase real property on which the builder would construct a home for a fixed price. The contract set out the home that was to be constructed, but also provided that other modifications to the design could be made at “cost to the buyer at ‘builder pricing’”.

Twenty-four change orders were made without the parties agreeing on how those change orders would affect the marked price. The builder attempted to charge the owner a 6% markup, and the owner signed the change order forms but refused to accept the markup. The builder eventually took the position that the owner had breached the contract and the builder purported to terminate the contract. The owner took the position that the builder was breaching the contract by refusing to continue construction, that the owner did not accept the builder’s breach of contract, and that the owner was demanding the builder perform the contract.

In its analysis, the Court rejected the argument by the builder that the contract was void for uncertainty which might have otherwise relieved the builder of its performance obligations. The Court cited law that every effort should be made by the Court to find an impugned contract has a meaning capable of determination by examination of the intentions of the parties and the language of the contract. The Court cited the modern framework for contractual interpretation which requires:

…a practical, common sense approach not dominated by technical rules of construction. The overriding concern is to determine the objective intent of the parties and the scope of their understanding. To do so, a court must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of the formation of the contract, otherwise known as the “factual matrix”…

The Court found that, while the contract in question was poorly drafted, “building pricing” was a phrase capable of interpretation. The contract simply provided that modifications to the fixed plans would be performed at the price set by the builder. The price was set out in the change orders prepared by the builder, whether accepted by the owner or not. As the Court put it: “The total purchase price would include the price of mutually approved modifications to the original house construction which proposed modifications were set at a price by the defendant, acting reasonably.”

In so finding, the implication of the Court’s decisions included that if the builder had not made the very commercially modest demand for payment at the price of cost plus 6%, the Court would have been called upon to consider what prevailing commercially reasonable rates of construction costs might be.

Despite finding that the builder’s position prevailed as to the amount chargeable under the contract, the Court also found that the builder had breached an explicitly stated fundamental term of the contract by failing to deliver all required work by the date fixed by the contract. In first breaching the contract, the builder relieved the owner of certain of its own contractual obligations, including to make payment as had been demanded. The owner rejected the breaches of the builder and demanded performance.

The Court found the property was unique enough that the owner was entitled to specific performance. In other words, that the builder was obliged to convey the property and complete all its construction obligations. The Court reiterated that it found the builder was entitled to its 6% markup. The court fixed a new completion date.

Bollhorn v Lakehouse Custom Homes Ltd. is an interesting decision in that the Court effectively found that both parties were right and both parties were wrong. The contractual relationship fell apart because the parties could not reasonably reach an accord on the interpretation of the simple contractual term requiring modifications to the subject contract to be determined by “cost to the buyer at ‘builder pricing’”. Both sides were exposed to significant legal expense as a result of their impasse, both sides were found to be wrong for failing to perform their part of the contract and both sides were likely facing a disallowance of some or all of their legal expense given the mixed success of the case. Had either side determined to simply perform all their contractual obligations, the outcome of the case would likely have been much better for that party.

The foregoing was provided for information only. It was not intended nor should be construed as legal advice. Unless noted otherwise, this article only reflected the law in the subject case at the time the case was reviewed. As such, the information or caselaw referred to herein may no longer be current.

 If you are dealing with a contractual dispute or issues in the purchase and sale of real property please feel free to contact Jeremy Burgess at 250-419-5096 or  Reed Pope also has a number of highly qualified lawyers with diverse experiences and expertise who are also happy to assist you and whom you can read about by clicking here.