In Nzeadibe v. Khan, 2017 CarswellBC 2251, 2017 BCSC 1456, the British Columbia Supreme Court recently held that a building contract was illegal and unenforceable because it provided for the construction of a building which would have been contrary to the municipal building bylaw. The decision raises, once again, the contentious role of the doctrine of illegality in contract law.

The defendant agreed to manage the construction of a residence for the plaintiff. The plaintiff said that he bought the property after entering into that agreement with the defendant. The plaintiff alleged that the management agreement called for the construction of a house of 3,638 square-foot and containing a self-contained suite. The written agreement between the parties did not refer to those features, but the plaintiff alleged that they had been agreed to orally. The defendant denied agreeing or representing that the building would have those features. The plaintiff sued for breach of the contract and fraud.

The building as built was substantially smaller than 3,638 square feet and it did not contain a self-contained unit. The construction of a residence in that location with that square footage and incorporating a self-contained suite would have been contrary to the municipal bylaw.

The Trial Judge’s Findings  

The trial judge found that the plaintiff obtained a draft copy of the plan for the building prior to purchasing the property and that the defendant orally committed to building the house according to that plan and informed the plaintiff that he could build a 3600 square-foot house with a secondary suite before the plaintiff purchased the property. However, the judge found that “the plaintiff’s experience would have shown him that this rough plan would not be the final or last plan necessary to obtain a building permit” and that the plaintiff “did not reasonably expect the defendant to build a house contrary to Surrey’s bylaws limiting the size of the structure and prohibiting a secondary suite” and was aware that a self-contained suite would be unlawful. The trial judge also found that the defendant forged the plaintiff’s signature on the alleged written agreement.

The Trial Judge’s Conclusions

The trial judge concluded that: the plaintiff agreed to purchase the property “based on the defendant’s statement that he could build a house with an area of 3500 ft.”; that the defendant’s statement was not a promise but was a representation; and that the defendant “knew that the house could not be built to the size or anywhere close to the size shown on the roof plan.”

The trial judge first found, in one short paragraph, that he could not arrive at a conclusion as to what exactly the contract between the parties was. He then considered, in forty-three paragraphs, whether the contract asserted by the plaintiff would have been illegal and thereby unenforceable, and concluded that it would have been:

“….in the context of personal contracts the inflexible application of the law of illegality is sometimes mitigated so that justice may be done. This principle does not, in my view, extend to the specific context and particular public policy considerations that pertain to the imposition on neighbourhoods of houses built at 30 percent above the allowable limit and encompassing illegal secondary suites that affect each neighbours’ enjoyment of their neighbourhood. Taking into consideration the context of the contract between the parties and the fact that the plaintiff has suffered little if any damage due to the alleged breach of the contract I find that the principles outlined in Top Line supports a conclusion that the contract alleged by the plaintiff is unenforceable….I conclude this case falls squarely within the parameters of an illegal contract that is unenforceable and against public policy. Municipalities have responsibilities to enforce the building protocols set out in their bylaws because of the aesthetic impact on neighbours and additional strains on public services. All neighbouring properties have an interest in enforcement of secondary suite bylaws because the densification created by unlawful suites affects neighbours….The contract to build a structure with an area of 3638 square feet with a secondary suite was contrary to a City bylaw permitting only 2765 square feet and precluding a secondary suite was an illegal contract and should not be enforced.”

In arriving at this conclusion, the trial judge relied principally upon the decision of Justice Newbury in Top Line Industries Ltd. v. International Paper Industries, 2000 BCCA 23. In that case, a lease of a portion of unsubdivided parcel of land was entered into, contrary to the restrictions established under s. 73 of the Land Title Act, and the court found that the lease was illegal.

The trial judge in the Nzeadibe case also concluded that the defendant misrepresented to the plaintiff that a house on the property could comprise more than 3000 square feet, that this representation induced the plaintiff to buy the property, that the defendant knew of the size limitation and suite prohibition affecting the property and made the representation to the plaintiff knowing that it was not true or being reckless as to its truth.

Discussion

This decision raises important questions about the role or purpose of the doctrine of illegality in construction law.

Is that role or purpose to prohibit contracts that have as their object or purpose the doing of something that is illegal or immoral? Or is its role or purpose to prohibit any contract the actual performance of which is contrary to a bylaw or other public law? And in either case, should the court delete the illegal portion of the contract and enforce the rest of it? None of these questions were satisfactorily addressed by the court in this case.

The doctrine of illegality has been addressed by the Supreme Court of Canada several times in the last twenty years or so, most noticeably in KRG Insurance Brokers (Western) Inc. v. Shafron, [2009] 1 S.C.R. 157, Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1S.C.R. 249 and Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986. These cases were not dealt with by the trial judge in the Nzeadibe decision.

The modern trend has been to not strike down a contract just because a statute is violated, and to apply judicial discretion across a broad spectrum of remedies, particularly if the rights of third parties are affected. The court may allow the contract to stand and apply the “blue pencil test” and excise the objectionable portions, but only if the purpose and policy of the statute is not subverted.

There are older Supreme Court of Canada decisions, in Walker v. McMillan, 1882 CarswellNB 71, 6 S.C.R. 241 and Spears v. Walker, 1884 CarswellNB 64, 11 S.C.R. 113, holding that a contract for the erection of a building which is itself contrary to municipal bylaws is an illegal contract. These decisions were not cited by the court in the present case, and they have hardly been cited by any court in the last 50 years. One wonders if these decisions, from an older era when contracts were routinely struck down if their performance infringed a public law, would still be applied.

Although the judge in this case did not address the “blue pencil test”, it is unlikely that the application of that test would have saved this contract. The court was confused enough about the terms of the contract. It is unlikely that the court could have concluded that the parties would have entered into the contract had it not contained, say, the provision relating to the separate suite.

One might expect that the legal principles would be clear in determining whether a building contract is illegal if it involves the construction of a building which is contrary to building or zoning bylaws. One might have that expectation since the construction of buildings that contravene bylaws is not an exceptional event. Yet, no clear statement of those principles emerges from the present decision.

In the present case, the judge seems most motivated by the degree to which the proposed building violated the bylaw, and the aesthetic impact upon neighbours that the building would have had. These are fairly subjective criteria and leave the court with a large discretion, and the parties with considerable uncertainty as to whether the contract will or will not be struck down.

The mere fact that a building contravenes a bylaw, no matter how incidentally, should not invalidate a building contract. Is it the degree to which the building violates the bylaw that makes it illegal? Is it the knowledge of both parties, or the plaintiff, or the defendant, that the building contravenes the bylaw? Is it the mutual purpose of the parties to contravene the bylaw? Is there any difference between a building bylaw (which this case involved) and zoning bylaws? And when, if ever, will the “blue pencil test” be applied to a building contract involving the breach of a bylaw?

We’ll wait for some appellate court to answer these questions.

See Heintzman & Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, section 3(e)

Nzeadibe v. Khan, 2017 CarswellBC 2251, 2017 BCSC 1456

Building contract – illegality – breach of building bylaws – “blue pencil” test

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                      December 10, 2017

www.heintzmanadr.com

www.constructionlawcanada.com