Canada: Municipalities And Additional Work: Formalism Is Essential!

In a judgment rendered on January 11, 2019 (Ville de Saguenay v. Construction Unibec Inc., 2019 QCCA 38), the Quebec Court of Appeal restated the principle that a municipality acts by a resolution of its council or by adopting a bylaw, and indicated that contractors should be prudent when the scope of work pursuant to a successful bid is changed or when unforeseen circumstances arise on the construction site.

In this matter, the City of Saguenay had awarded general contractor Construction Unibec Inc. a contract for the construction of a multi-purpose community centre, for an initial price of $3,116,655.53.

Anticipating an exceptionally strong turnout for its 18th annual Festival forestier, an event celebrating the forestry industry, the City, during the performance of the contract, expanded the scope of the initially specified work.

The changes essentially consisted of paving the forecourt of the building rather than the rear, increasing the dimensions of the paved surface to accommodate a large tent for festival-goers, and redoing the drainage system on the property.

The City agreed to the cost adjustment submitted by the contractor in the amount of $148,588.71 (the "Change Order"), supported by a council resolution authorizing its negotiation up to $201,102 in additional funds.

In the course of performing the work covered by this Change Order, however, an additional amount of backfill material was allegedly required. The contractor maintained this amount was unforeseeable.

The contractor and the City's external consultants (Gémel Inc.) agreed orally, without further formality, that the additional material would be paid for on a cost-plus basis, i.e. the cost of the material plus that of the additional labour required.

Predictably, the City ultimately refused to pay for this cost overrun, and insisted that only the amount expressly stipulated in the Change Order would be paid.

The City called Gémel Inc. in warranty, seeking to have the latter indemnify and save it harmless from any judgment in favour of the contractor.

At trial, the Superior Court concluded that the additional backfill material was included in the scope of the Change Order, but nevertheless ordered the City to pay the cost thereof to the contractor, based on the oral undertaking given by its consultants.

The City's warranty action against the consultants was however dismissed, as they were found not to have committed a fault.

The Court of Appeal found that the trial judge had committed errors both of law and in assessing the evidence, concluding:

  • a change in the construction contract between the City and the contractor, without a further call for tenders, required that the following conditions be met, failing which the change would be null and void:
    1. the change must constitute an accessory to the principal contract;
    2. it must not change the nature of the principal contract;
    3. it must be confirmed by a resolution of city council or a bylaw, given that an employee cannot bind a municipality.
  • in this instance, none of these conditions was met;
  • in any event, the evidence did not show that there was even oral consent or corroboration by a City representative of the "cost plus" extra not expressly included in the Change Order.

As for whether or not, in the case of a nullified contract, restitution applies (each party must return to the other anything received in error or without right) or the principle of unjust enrichment, the Court:

  • (restitution) relied on its decision in Ville de Montréal v. Octane Stratégie Inc., even though that case will be ultimately decided by the Supreme Court of Canada in an upcoming judgment (the City of Montreal is arguing that restitution should not apply to municipal contracts in order to avoid circumventing the applicable laws on the awarding of public contracts);
  • (unjust enrichment) concluded that the Change Order determined the rights of the parties vis-à-vis the backfill material, regardless of a possible error on the part of the contractor when submitting its bid.

The Court of Appeal thus dismissed the contractor's action, and accordingly did not see fit to rule on the City's warranty claim against its consultants.

It is therefore important for contractors to ensure that any change to the initially agreed work or provision for unforeseen contingencies during its performance is covered by a municipal council resolution or bylaw, notwithstanding any informal agreement and the desire to have the work proceed without interruption: otherwise, the corresponding payment may not be forthcoming.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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