Canadian homebuilders who arbitrarily cancel contracts with their customers - citing clauses they believe let them off of the hook when costs rise to unexpectedly high levels - may be flirting with legal peril.
The clauses these builders rely on are called "force majeure," French for "greater force.”
Commonly found in construction contracts, these allow a party to cancel a contract when some unforeseen event beyond the party's control prevents it from fulfilling its obligations.
Examples that the contract might cite include blockades, insurrection, hurricanes, the sudden coming of a new ice age or Earth being struck by an asteroid. These are seen as acts of God, and thus beyond the control of mortal homebuilders. To hold a builder to such a contract would subject him unfairly to certain ruin.
|File photo by Ken Kerr, Business Edge|
|Homebuilders must understand the legal ramifications of cancelling a contract with a buyer.|
However, some builders are interpreting this to include abrupt, unforeseen changes in the business environment, such as an increased cost of supplies or a shortage of tradesmen. Faced with such challenges, they resort to cancelling contracts and attempting to renegotiate them.
When this happens, consumers get cranky.
Booming Alberta, which has seen more than its share of home construction, is no stranger to the cancelled contract. Thirteen clients of Reid-Built Homes, for example, sued the Edmonton-area homebuilder last fall for cancelling their agreements and then raising the price of their homes.
Reid-Built's lawyer has said the cancellations were necessary because the company couldn't get building permits issued within 60 days of the agreements being signed.
The Alberta New Home Warranty Program (ANHWP) and Canadian Home Builders Association-Alberta acknowledge that they have heard complaints about cancellations. Some builders have relied on the cancellation clause in the purchase agreement or construction agreement that ANHWP recommends to its builders.
In a 2006 article published in ANHWP's newsletter From the Ground Up, Calgary lawyer David Tettensor cautioned builders about taking such action without consulting with a lawyer.
Force majeure clauses, Tettensor explained, are meant to relieve parties involved in contractual obligations from having to carry out their end of the bargain in the face of events that are "unexpected, something beyond reasonable human foresight and skill."
"Courts have been clear they are not to protect against poor business decisions," he added.
"Cancellation, except in the clearest of cases, carries significant risk," the lawyer wrote. "Courts are reluctant to allow any party to escape obligations in a contract, let alone the party with the experience and control of the process and in the better position to understand the economic circumstances of the industry."
Tettensor's comments were guided by a landmark 1975 Supreme Court of Canada judgment - Atlantic Stock Paper Limited and Elliot Krever & Associates (Maritimes) Ltd. vs St. Anne-Nackawic Pulp and Paper Company Limited - that held the pulp and paper company responsible for honouring its end of a contract that it wanted to cancel.
St. Anne signed a contract, then told its two waste paper suppliers that declining markets were forcing it to invoke the force majeure clause. But the high court did not accept the company's arguments.
"The project, conceived in ephemeral hopes and not the harsh realities of the marketplace, resulted in a failure for which St. Anne and not changes in the market ... must be held accountable," the Supreme Court decided.
In a more recent case, the Court of Appeal of Alberta ordered a new trial in 1996 in Atcor Ltd. vs Continental Energy Marketing Ltd. after deciding that the real purpose of a force majeure clause is to deal with the effect of the event, not simply the occurrence.
Continental, a marketer of natural gas, sued after pipeline disruptions drove supplier Atcor to invoke its force majeure clause. In ordering that the matter be retried, the appeal court found that Atcor would have been obliged to carry out its agreement if it were commercially reasonable for the supplier to acquire a new supply of gas.
The Court of Appeal of Alberta pointed out that a force majeure clause should address three questions:
* How broad should the definition of the triggering events be?
* What impact must those events have on the party who invokes the clause?
* What effect should the invoking of this clause have on the contractual obligation?
"Once it is established that a triggering event in a force majeure clause has occurred, the next step is to determine how it affects the parties to the contract," Edmonton lawyer Debra Curcio Lister of Miller Thomson LLP wrote in a 2005 Alberta construction communiqué posted on her law firm's website.
"In order for a party's obligations to actually be suspended or excused, the party seeking to rely upon it must be unable to perform its contractual obligations ... " Grant Ainsley, executive officer of the Canadian Home Builders Association-Alberta, says consumers tend to be less forgiving than companies of the kind of pickle that a member of the business world can get itself into.
Builders get into such fixes by trying to compete against cutthroat prices, Ainsley says. "They can get caught by charging too little," he adds.
"It becomes a very difficult situation."
Sky Wensel, chief operating officer for the Alberta New Home Warranty Program, notes his program has put together training packages for builders to bring them up to speed on the business and marketing end of running a building business. These include Master Home Builder courses that, among other things, give builders a basic grounding in business law.
Wensel, who formerly practised law, says most builders take care to ensure they are on solid ground before they cancel a contract. His advice to builders: "Don't make an agreement to sell what you can't build at a reasonable profit."
Burnaby, B.C., home renovator Ralph Belisle, president of Canadian Home Builders' Association-B.C., agrees builders in hot markets should avoid committing themselves too far into the future.
"The materials market and the labour market are really volatile," he says.
Janice Wong of Toronto, spokeswoman for Tarion Warranty Corp., says the new-home warranty program encourages builders to honour their contractual commitments, except in rare situations where it would make good sense for parties to be released from the contract.
"This view is strongly supported by builders in Ontario," Wong says.
The governing Ontario New Home Warranties Plan Act is silent on whether builders are at liberty to cancel contracts on the basis of unexpectedly high costs, Wong says.
However, the act requires that all home contracts commit the builder to building the home without "undue delay" and that the builder not unilaterally rescind the agreement solely due to a failure to complete the home by the closing date.
"Tarion's experience is that most vendors deal with difficulties in constructing their homes by extending the relevant closing dates rather than attempting to cancel the agreement of purchase and sale," Wong says.
(Brock Ketcham is an Edmonton-based writer who specializes in consumer and public policy issues. He can be reached at firstname.lastname@example.org)