In the recently released decision in Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11, the Alberta Court of Queen’s Bench applied three potential aids to the interpretation to a client-consultant contract: contra proferentem; post-contract conduct; and estoppel. The court also applied the limitation period to a claim for a percentage-based fee.

The Interpretation and Limitations Issues

After the project was finished, the architects asserted that, on a proper interpretation of the client-consultant agreement, the fee should have been paid on a percentage basis, not a fixed fee basis. The architect relied upon the principle of contractual interpretation known as contra proferentem since the client (the University) had prepared the six drafts of the agreement. The owner asserted that the fee was a fixed fee, and also said that the contract should be interpreted in light of the parties’ actual performance of the contract and that the consultant was estopped from asserting that the fee was based on a percentage of the cost of construction.

The owner also asserted that the consultant’s claim was barred by the limitation period since more than two years had expired from the time when, if the consultant was correct, the fee would have amounted to more than the consultant was paid under the contract and the consultant knew or should have known that the owner was in breach of the contract.

Contra Proferentem

The Alberta court held that there was very little, if any, place for the application of the contra proferentem rule in the present circumstances:

“Where an ambiguity arises in respect of a matter that has been specifically flagged for future negotiation between two sophisticated parties, it should be resolved through the usual principles of contractual interpretation. This includes have regard to the factual matrix and, in some limited circumstances, post-contract conduct that might assist in determining the objective of the parties. The doctrine of contra proferentem has very limited utility or application in that analysis.”

Post-contractual conduct

During the performance of the contract, the parties proceeded on the basis that the fee was a fixed fee, not a percentage fee, but that the consultant was entitled to extra payment for work done in relation to change orders. The Alberta Court held that, in interpreting the contract, it was proper to look at this post-contractual in arriving at the proper interpretation of the contract, particularly when the conduct was consistently and unambiguously in favour of one interpretation:

“…..Such post-contract conduct is not properly considered as part of the factual matrix bearing on the intention of the parties at the time the contract was entered into. It may be considered, however, in the resolution of ambiguity in the contractual language used: Shewchuk v Blackmount Capital Inc., 2016 ONCA 9123 at 41….A cautionary approach is required where evidence of such subsequent conduct is used for the purpose of divining intention. It must generally be given limited weight, but “will have greater weight if it is unequivocal in the sense of being consistent with only one of the two alternative interpretations that generated the ambiguity triggering its admissibility”: Shewchuk at para 54. In this case, the language used in each of the six Change Orders signed by the parties during the project is both consistent and unequivocal in treating the work done by RKA as being part of the basic services. The language is also consistent with being compensated through adjustments to the “Fee for Service” under Section 1 of Schedule C to the Service Agreement.” (underlining added)

Estoppel

For the same reason, the Alberta court held that, by conducting itself throughout the project on the basis that the fee was payable on a fixed basis, the consultant was now estopped from asserting the contrary:

“…..it is reasonable to infer from the evidence that, had RKA refused to approve and sign-off on the Change Orders as worded, there would have been, at minimum, a discussion and negotiation of how RKA should be compensated, having regard for the wording of Article 4.3.2 and the fee negotiation contemplated in respect of fees for “Additional Services.” By RKA acquiescing in the Change Order process as implemented, only to assert its entitlement to additional fees well after conclusion of the project, the University was deprived of that negotiation (or termination) opportunity to its detriment…… Accordingly, had I accepted the position of RKA regarding the proper interpretation of the Service Agreement, I would have nonetheless found them to be estopped from claiming damages for breach of the Service Agreement.”

The Limitation Period

The Alberta Court held that the consultant’s claim was barred by the Alberta two year limitation period. If the consultant was correct that the contract provided for a fee based on a percentage of the cost of construction, then during the course of the project it would have been apparent to the consultant that the cost of construction had much exceeded the projected cost and that the consultant was owed a much higher fee than was being paid to it. More than two years passed from that point in time before the consultant made its claim.

The consultant asserted that the fee was not truly payable until its legal entitlement to percentage-based compensation was known, which it asserted was not known until the building was complete and the construction costs were known with certainty.

The Alberta court accepted the owner’s submissions:

“The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed. It is also clear that RKA was being paid for ongoing work, excluding the separately negotiated FFE Agreement, pursuant to a series of Change Orders purporting to contain add-ons to the basic services fee described in Section 1 of Schedule C…..Accordingly, the essential facts supporting a breach of contract under RKA’s interpretation of the Service Agreement were probably known as early as March 23, 2009. These facts were certainly known when the post-project reconciliation of amounts paid to RKA, as against amounts owing under the contract, was done in March 2010. Accordingly, if RKA is correct in its interpretation of the Service Agreement, and is not estopped from claiming a breach, it would nonetheless have been out of time pursuant to the Limitations Act.”

The Merits Of The Claim

The court reviewed what it described as the “poorly drafted” and “confusing and ambiguous language” of the contract. Thus, the RFP for the contract stated that the “fees will be based as a percentage (%) of the total construction budget” and the heading to Article 4.3 of the contract stated that the fee was a “Percentage-Based Fee”. However, article 4.3.2 stated: “For greater certainty, the Fee for Services as set out in Schedule C is a fixed fee, and there will be no adjustments to the fee in the event of changes in Construction Cost due to inflation. The fee will only be adjusted in the event and in accordance with an approved Change Order which changes the Scope of Work and results in an upward adjustment in the Construction Cost or Contract Time.” Schedule C to the contract stated: “(a) Fixed Base Fee…”

After sifting through all this inconsistent language, the Alberta court held that the contract provided for a fixed fee, not a percentage fee based upon the cost of construction. The court also held that the consultant was entitled to extra fees in relation to work done on the change orders:

“Article 4.3.2 shows that the parties intended that the fee for services be a fixed fee….. Although poorly drafted, Article 4.3.2 also shows that, on an objective basis, the parties intended that compensation for basic services in respect of changes to the scope of work being done, as opposed to “Additional Services,” are to be governed by Article 4.3 and the corresponding provisions of Schedule C…..The language used by the parties in Article 4.3.2 allows the University to exercise a measure of cost control by reviewing and approving Change Orders, and to adjust the base fee for services through the Change Order process. Section 1.3(a) of Schedule D of the Service Agreement includes, as “Additional Services,” revising or providing additional drawings, specifications, or other documents “caused by instructions inconsistent with instructions or written approvals previously given by the owners, including revisions made necessary by adjustments in the Owner’s program or Project Budget….The better view, however, is that the inclusion of services associated with a scope of work change in Article 4.3.2 was intended to bring them within the ambit of services compensable through adjustment to the fixed base fee as set out in Section 1 of Schedule C.”

Accordingly, the court dismissed the consultant’s claim for further fees based on a percentage of the cost of construction.

Discussion

It is not often that one construction law case deals with a number of contract interpretation principles and the limitation period. This decision will be a useful guide to those principles for application in similar circumstances.

The court was strongly influenced by the fact that, throughout the project, the consultant participated in the calculation and payment of the fee on a fixed fee basis, and did not suggest, until the project was well over, that the fee should have been paid on a percentage basis. Clearly there is a lesson for consultants here: be up front about the basis for the fee, and don’t try to assert a different basis after the fact.

The court’s conclusion on the limitations issue might be contentious. Under section 3(1) of the Alberta Limitation Acts, the limitation period starts to run when the claimant knew or ought to have known that: (i) injury for which the claimant seeks a remedial order had occurred, (ii) that the injury was attributable to conduct of the defendant, and that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding.

Accordingly, the limitation period only commences when the cause of action arises and (not or) the claimant knows or ought to know that it has a claim. In other words, the fact that the claimant knows or ought to know that the defendant’s conduct amounts to a breach of contract, and that the claimant will have a claim, does not start the limitation period unless the time for the obligation to be performed has arrived and an accrued cause of action exists (unless the claimant treats the defendant’s conduct as an anticipatory breach of contract and terminates the contract forthwith).

If the fee in this case was payable by installments, and each instalment was itself legally due and payable during the project at the stipulated time or event, then the limitation period for each payment then arose. But if, on the proper construction of the contract, the fee was one fee only earned on the completion of the project, although payable during the project by way of part-payments, then the limitation period would only arise when the fee was fully earned. And even in the first case, the limitation period would only expire payment by payment, and would not expire for those payments payable less than two years before the action was commenced.

The Alberta court did not discuss when the cause of action for the fee payments arose. In its view, the essential question was: “when the facts giving rise to the claimed breach were known or discoverable.” It further stated: “The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed.” It appears to have assumed that the obligation to pay had by then arisen. If that assumption is correct, then the court’s conclusion is correct. If the obligation to pay had not yet arisen, even though the clamant had submitted interim bills, then the court’s conclusion may not be correct. In addition, if any of the client’s payment obligations fell within two years of the commencement of the action, then the action may have been timely with respect to those payment obligations.

All of which is to say that the parties to a building contract that take a long time to perform should be careful about limitation periods that may arise during the contract. A building contracts is usually considered to be “entire”, “dependent” or “whole” contract, under which the obligations are not independent but dependent on one another, and not fulfilled until entirely fulfilled. However, the part payment obligations under a building contract are usually considered to be severable and presently enforceable as to each payment. This is how the Alberta court considered the payments under this consultant’s agreement. The issue may be disputable under another building or consultant’s contract.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, part 3(f), chapter 2, parts 2(3)(f), 2(4)(iii) and chapter 9, part 3(a).

Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11

Building Contracts – Interpretation – Estoppel – Contra proferentem – Post-contract conduct – Limitation periods

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                     January 29, 2018  

www.heintzmanadr.com

www.constructionlawcanada.com