This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its January 2006 decision in Alumitech Architectural Glass & Metal Ltd. v. J.W. Lindsay Enterprise Ltd., the Nova Scotia Supreme Court dealt with a dispute over the appropriate amount of compensation owed to a contractor where the parties had failed to properly establish a pricing structure for their project. The dispute arose over a building project for a new Faculty of Arts and Social Sciences building at Dalhousie University. The defendant, Alumitech Architectural Glass & Metal Ltd., was the successful bidder. The plaintiff, J.W. Lindsay Enterprises Ltd., was an unsuccessful competing bidder who approached Alumitech after the tendering process to attempt to secure some work as a subcontractor.
The parties entered into negotiations and agreed to a price of $240,000 for Lindsay to install approximately 18,000 square feet of block wall and 21,000 square feet of stud wall. However, the project would ultimately require only 31,000 square feet of wall total, which was a considerably lower amount than the original estimate of 39,000 square feet. A dispute arose between the parties over whether Lindsay was entitled to the full $240,000.
Lindsay maintained that the parties had agreed to a flat rate contract in the amount of $240,000 for the total amount of erected wall required by the project. Alumitech disagreed, arguing that the payment structure was based on a unit price of $6.1538 per square foot, calculated by dividing the originally agreed-upon price by the originally anticipated square footage. Alumitech maintained that this unit price entitled Lindsay to a lesser amount of $191,000 for erecting 31,000 square feet of wall instead of $240,000 based on the assumption of 39,000 square feet.
After considering the evidence, the Court concluded that there had not been a meeting of the minds on the pricing structure for the contract:
Was the Contract for Unit or Lump Sum Price?
Having reviewed the evidence, including documentary evidence, I am satisfied there was no consensus or meeting of the minds as between Eblaghi, on behalf of Alumitech, and Wilson, on behalf of Lindsay. Clearly Eblaghi believed, and continues to believe, he had negotiated a unit price contract with Wilson notwithstanding the form of the purchase order he issued which, on its face, suggested a lump sum contract, although also containing an estimate of the square footage of work to be completed by Lindsay. I am satisfied, having heard and considered the evidence of Eblaghi that he viewed the figures as representing the cost for the square footage being advanced by Lindsay. He understood, from his discussions with Wilson, Lindsay would be conducting a recalculation of the square footage which, he believed, would result in a corresponding downward adjustment to the price for the work.
Since the parties never properly established a pricing structure for the contract, the Court applied the doctrine of quantum meruit and determined that Lindsay should be paid a “reasonable amount” for the work it had performed. The Court noted that arriving at a reasonable price in such circumstances is no easy task and leaves open a number of options for quantification:
On the difficult question of determining what would be a reasonable remuneration, the Nova Scotia Supreme Court, Appeal Division, in Ivan B. Crouse & Son Ltd. v. Cameron, [1974] N.S.J. No. 168; 6 N.S.R. (2d) 590 at para. 29 observed:
This brings me to the extremely difficult issue of determining what is reasonable compensation in this particular case. As stated in the last preceding quote from Hudson’s Building and Engineering Contracts and that from Keating, Law and Practice of Building Contracts, the court may:
(1) Act upon evidence calculated upon the cost of labour, plant and materials, plus a reasonable percentage for profit, or
(2) Act upon evidence of what reasonable rates for the work involved would be.
(3) Consider abortive negotiations as to price.
(4) Consider the opinion of experienced builders or other experts as to a reasonable sum.
Lindsay provided evidence to support a quantification under the first method noted above, submitting its cost ledger and purchase journal to show costs at $235,720. It argued that the $240,000 it sought translated into a mere 2 percent profit margin. While the Court was reluctant to award Lindsay the full amount originally contemplated by the parties for less than the full amount of work, it noted that Alumitech failed to provide any useful evidence to assist in arriving at a reasonable alternative quantification:
With Lindsay’s position, I obviously have some difficulty. However, the evidence as to the costs incurred by Lindsay was not seriously challenged by counsel for Alumitech, who merely suggested during oral submission that there may have been cost overruns, work inefficiencies or mis-budgeting. Counsel suggested there is no evidence that the unit price of $6.1538 was not a reasonable figure and suggested the burden is on Lindsay to prove that its costs were reasonable.
As was the case in Stevens & Fiske Construction Ltd. v. Johnson, supra, there is no evidence to offset the suggested costs incurred by Lindsay for the work. Having regard to the four alternatives for calculating a reasonable remuneration, there is no evidence of what would be reasonable rates for the work involved, no evidence of aborted negotiations as to price that would assist is suggesting a reasonable remuneration nor expert evidence of experienced builders or other experts as to what would be a reasonable sum. The only evidence tendered, and on which I can act, is the evidence of the costs for labour and material incurred by Lindsay in performing the project.
In the absence of any compelling rebuttal evidence, the Court was left with little choice but to award Lindsay the full $240,000 even though it erected only 31,000 square feet of wall instead of the originally contemplated 39,000 square feet.
As this case shows, the failure to clearly establish the pricing structure for a contract can have significant adverse consequences for purchasing institutions. Contract drafters would be wise to draft their pricing provisions with precision to guard against similar disputes in their own projects.
