If a Renovation Contract Gets Cancelled Because of Covid19 Should the Deposit Be Refunded?

Restrictions on Construction and Renovation Projects Due to Covid19 May Nullify Various Contracts. Contractors May Be Required to Refund Deposits. Contractors May Be Entitled to Payment for Partial Services Such as Design, Among Other Things. As an Unprecedented Event the Legal Affects of Covid19 Remain Widely Unknown.

Similar Questions about Contracts affected by Covid19:

  • If a Project is Delayed because of Coronavirus can the Contract be Cancelled?
  • If a Customer wants to Cancel a Contract because of Covid19 must a Deposit be Refunded?
  • What Happens if a Renovation Project was Due to Start but is Now Unlawful Due to Covid19?
  • Can a Contractor Delay a Renovation Contract because of Covid19?
  • If a Contract is Cancelled because of Covid19 does the Contractor get to Keep the Deposit?


A Helpful Guide on How to Prepare for Various Legal Issues Involving the Contracting Trades as Arising from Covid-19

Lawsuit DocumentLike many business sectors, the Covid19 crisis gives rise to many unprecedented legal issues affecting the contracting trades sector.  These issues affect the nature of relations in a variety of ways, a few of which are touched upon below.  Of course, as the coronavirus situation is unprecedented, and whereas the law is without precedent experience in addressing many of these unique concerns, legal professionals are finding some difficulty providing clear information and advice.  Where answers are vague or absent, such is quite possibly because the answer is lacking and until courts reopen and cases are decided, some questions can only be answered with weill informed guesses based on fundamental legal principles as well as common sense.

Some of the common current concerns affecting the contracting trades include:

  • Whether a contractor must return a deposit when now unable to perform a contract;
  • Whether a customer must pay for services partially completed while waiting out the crisis;
  • Whether a contractor can impose rescheduling of the project to a much later date;
  • Whether the statutory twenty-eight (28) day payment requirement remains applicable; and
  • Whether a customer can demand that work gets done even if doing so puts employees at risk.

These are just a few of the likely legal issues that contractors and customers will be dealing with.

This article is aimed at contractors or project owners (such as homeowners or a small business) as parties to common construction or renovation project such as a pool installation, a basement renovation, or building of an addition, among others.  Major projects, which involve large contractors and land development corporations and perhaps government entities, such as erection of a high-rise office tower, public building, or highway bridge, are beyond the intended scope of this article.

Mandated Shutdowns

Effective at 11:59 pm, on Saturday, April 4 2020, per O. Reg. 119/20 to section 7.0.2(4) the Emergency Management and Civil Protection Act, R.S.O. 1990, c. E.9, many businesses are required to close including various contractors.  The closure requires ceasing of any public operations at the physical location of the business as well as ceasing of any off-site services.

Construction

The only construction work permitted to continue includes:

Construction projects and services associated with the healthcare sector, including new facilities, expansions, renovations and conversion of spaces that could be repurposed for health care space.

Construction projects and services required to ensure safe and reliable operations of, or to provide new capacity in, critical provincial infrastructure, including transit, transportation, energy and justice sectors beyond the day-to-day maintenance.

Critical industrial construction activities required for,

the maintenance and operations of petrochemical plants and refineries,

significant industrial petrochemical projects where preliminary work has already commenced,

industrial construction and modifications to existing industrial structures limited solely to work necessary for the production, maintenance, and/or enhancement of Personal Protective Equipment, medical devices (such as ventilators), and other identified products directly related to combatting the COVID-19 pandemic.

Residential construction projects where,

a footing permit has been granted for single family, semi-detached and townhomes,

an above grade structural permit has been granted for condominiums, mixed use and other buildings, or

the project involves renovations to residential properties and construction work was started before April 4, 2020.

Construction and maintenance activities necessary to temporarily close construction sites that have paused or are not active and to ensure ongoing public safety.

Maintenance

The only maintenance work permitted to continue includes:

Maintenance, repair and property management services strictly necessary to manage and maintain the safety, security, sanitation and essential operation of institutional, commercial, industrial and residential properties and buildings.

These closures and cessation requirements including restrictions applicable to the contracting trades and therefore affecting many construction and renovation projects, especially the common and typical springtime projects contemplated within the contracts of small contractors.  Projects such as landscaping, pool installation, basement renovations, building of decks and fences, roofing, painting, among other things, must now be put on hold.  In many cases, some customers who entered into such contracts may prefer to terminate the agreement rather than postpone the project.

Understanding the Seriousness, likely legal issues

Typical of the contract arrangements for common projects, the paperwork to document the agreed upon terms will be minimal.  Frequently, the contract for common projects will merely provide an outline of the purpose of the project, a summary description of the quality of material specifications and a price.  The legal technicalities that would be found within the thick pages of a major construction project are completely lacking.  Of course, whereas this is common, this is said without criticism especially in understanding that the small contractor and small project owner are usually without a full legal and risk management department.

Due to the informality of contract agreement document and the lack of review and discussion on many of the possible 'what ifs', disputes and legal issues that arise in the best of times are now even more difficult due conflicts often stemming from the informalities.  Furthermore, and in addition to the contractual issues, legal implications arising out of statute law may also be in the mix.  These statutes include, among possible others:

With so many laws intermingling so to affect the legal issues applicable to construction or renovation projects, small contractors and project owners may struggle to find common ground when disputes arise.  Accordingly, obtaining the assistance of professional advice and opinion, such as from Benchmark Legal Offices, may be necessary to help ensure that important decisions are made from a 'best informed view'.

Contract Concerns
Impossibility of Performance by Frustration

When a contract, such as a construction or renovation contract, becomes impossible by an unforeseen reason that is outside the control of the parties to the contract, that contract may be deemed frustrated and further obligations within nullified.  Where a contract is frustrated and further obligations nullified, a party, or parties, who thereafter fail to fulfill performance of the requirements witihin the contract are legally viewed as without commiting a breach of the contract.  Said another way, if a person is unable to perform what the person previously agreed to do, and is unable because of an unexpected cause beyond the reasonable foresight of the parties to the contract, then the further contract obligations are treated as a nullity and without any legal blame falling upon either party.  This nullifying of obligations for what unforeseeably became an impossible to perform contract is prescribed by the Frustrated Contracts Act, R.S.O. 1990, c. F.34 which is applicable to almost all types of contracts including construction contracts or renovation contracts and the like.

Of course, whether a contract is actually impossible, rather than merely impractical or unviable, can be the basis of substantial argument and legal debate; and accordingly, for a party to a contract to rely on the Frustrated Contracts Act as an 'out' from an agreement, that party will hold the burden of demonstrating that indeed the contract became impossible due to a circumstance out of the control of the parties to the contract and as a circumstance unforeseen when the contract was established.  It is quite likely that, in many respects, Covid19 will cause the impossibility of performance for many contracts including agreements relating to construction or renovation projects where restrictive orders per the Emergency Management and Civil Protection Act make various activities unlawful.  An example of unlawfulness is the prohibition against residential renovation work unless the project commenced prior to April 4 2020; and therefore any project with a contract scheduled to start after April 4 2020, and for the two weeks of the prohibition (or longer if the prohibition is extended) may now be a frustrated contract made impossible due to restriction by government order.  Due to these circumstances, contracts, or at least certain terms within contracts, may now be unlawful and thereby impossible to properly perform thereby frustrating the contract per the Frustrated Contracts Act.

Employment Disruptions

Another concern that could unexpectedly make a project impossible to complete as contractually agreed involves the right of employees to reasonably decline to work in unsafe conditions as per Occupational Health and Safety Act protections.  It appears possible that a contractor, where such a contractor is currently legally permitted to operate, with good intentions to deliver as agreed, could become unable to perform because of workers who are unwilling to work due to workplace safety concerns.  Where the safety concern is the coronavirus, the inability to perform may be legally viewed as becoming impossible due to the coronavirus as an unexpected circumstance outside the control of the parties to the contract and thereby triggering of the Frustrated Contracts Act.

Consumer Protection

When agreements relating to construction and renovation projects are entered into between a business and consumer and the agreement includes a work start date other than the date the agreement was entered into, such is known as a 'future performance contract' per the Consumer Protection Act, 2002S.O. 2002, Chapter 30, Schedule A.  Per section 26 of the Consumer Protection Act, when a business, such as a contractor, fails to start work within thirty (30) days of the stated start date, the consumer has the right to cancel the contract.  Specifically it is stated that:

26 (1) A consumer may cancel a future performance agreement at any time before delivery under the agreement or the commencement of performance under the agreement if the supplier,

(a) does not make delivery within 30 days after the delivery date specified in the agreement or an amended delivery date agreed to by the consumer in writing; or

(b) does not begin performance of his, her or its obligations within 30 days after the commencement date specified in the agreement or an amended commencement date agreed to by the consumer in writing.

Due to the Covid19 crisis and government ordered shut down of various businesses, many projects, construction or renovation, with start dates previously planned and contractually agreed to begin are now delayed.  Accordingly, per the Consumer Protection Act, it would appear that the consumer holds the right to cancel the agreement; however, per the Order as O. Reg. 73/20 issued on March 17 2020 pursuant to the Emergency Management and Civil Protection Act, the running of certain deadlines, such as limitation periods, are currently suspended.  Specifically, the Order states, in part:

1. Any provision of any statute, regulation, rule, by-law or order of the Government of Ontario establishing any limitation period shall be suspended for the duration of the emergency, and the suspension shall be retroactive to Monday, March 16, 2020.

While it is anticipated that the thirty (30) day limit is unaffected by the Order, and therefore the limit remains applicable, without precedent legal decisions to confirm whether the thirty (30) day limit is, or is other than, a type of limitation period captured by the Order, it may arguable that the thirty (30) day limit is captured by the Order suspending limitations periods.  If so, the consumer protection intended nature of the Consumer Protection Act appears to fail.

Returning of Deposits

Where a contract is frustrated per the Frustrated Contracts Act, or the contract comes to an end due to cancellation per the Consumer Protection Act, or otherwise where the further obligations within become a nullity, generally, any prepaid deposits must be refunded.  In regards to a frustrated contract, the Frustrated Contracts Act specifically states:

3 (1) The sums paid or payable to a party in pursuance of a contract before the parties were discharged,

(a) in the case of sums paid, are recoverable from the party as money received for the use of the party by whom the sums were paid; and

(b) in the case of sums payable, cease to be payable.

Accordingly, per the Frustrated Contracts Act, a deposit, as "sums paid" is recoverable and any further obligations are relieved with respect to any further "sums payable".

In regards to a contract cancelled by a consumer in accordance to the rights to do so and the cancellation procedures prescribed within the Consumer Protection Act, it is stated:

95 The cancellation of a consumer agreement in accordance with this Act operates to cancel, as if they never existed,

(a) the consumer agreement;

(b) all related agreements;

(c) all guarantees given in respect of money payable under the consumer agreement;

(d) all security given by the consumer or a guarantor in respect of money payable under the consumer agreement; and

(e) all credit agreements, as defined in Part VII, and other payment instruments, including promissory notes,

(i) extended, arranged or facilitated by the person with whom the consumer reached the consumer agreement, or

(ii) otherwise related to the consumer agreement.

96 (1) If a consumer cancels a consumer agreement, the supplier shall, in accordance with the prescribed requirements,

(a) refund to the consumer any payment made under the agreement or any related agreement; and

(b) return to the consumer in a condition substantially similar to when they were delivered all goods delivered under a trade-in arrangement or refund to the consumer an amount equal to the trade-in allowance.

(2) Upon cancelling a consumer agreement, the consumer, in accordance with the prescribed requirements and in the prescribed manner, shall permit the goods that came into the consumer’s possession under the agreement or a related agreement to be repossessed, shall return the goods or shall deal with them in such manner as may be prescribed.

Accordingly, upon rightful cancellation of the agreement, the consumer is entitled to return of deposit, or other prepaid and unearned monies.  Additionally, the consumer also has the obligation to return, or permit repossession, of goods that may have come into the possession of the consumer such as material delivered to the work site that was intended for installation.

With these points said in respect of return of deposit, among other things, as explained below in respect of monies which may remain payable for goods and services provided or otherwise already received, it is important to bear in mind that rights and obligations, such as the right to receive, or obligation to return, deposit monies, such applies merely to, and only in, the realm of contract law and other rights and obligations as legal concerns outside of contract law may remain unaffected. 

Partially Rendered Services

A quandry arises whereas, at first glance, both a contract frustrated per the Frustrated Contracts Act as well as a contract cancelled per the Consumer Protection Act initially appear to show that deposits and other prepaid monies are fully refundable.  Indeed, as is indicated these statute laws require that obligations within frustrated or cancelled contracts be treated as nullities.  However, the nullification of obligations within contracts merely nullifies the corresponding contract law duties.  Duties and obligations in law may, and often do, remain applicable within a realm outside of contract law principles.

Quantum Meruit

The legal principle of quantum meruit, being Latin for, loosely, 'the amount that it merits', arises out of the law of equities or 'fairness' rather than the law of contracts.  Accordingly, where the Frustrated Contracts Act and the Consumer Protection Act solely address issues arising in contract law, including nullity of obligations within contracts as contract law obligations, the law of equities, including rights and obligations within the realm of the law of equities, remain unaffected.

Albeit a renovation contract cancelled for reasons other than Covid19, yet very thorough in addressing issues such as return of deposit monies per the Consumer Protection Act with some setoff for value of partial services rendered, is the case of Sawh v. Par-Tek Construction Services Inc., 2017 CanLII 53634 which dealt with many of these issues, although, again, arising from a different reason.

Personal Liability

Interesting, per the Sawh case at paragraphs 61 to 64, also addressed the issue of personal liability for the return of deposit monies whereas deposits prepaid for a future construction or renovation project that is terminated without fault of, or in accordance to the rights of, the consumer prior to commencement of the project should be held in a trust account rather than comingled with the general funds of the contracting business.  If the contracting business failed to hold the deposit monies in trust, the directors or officers of the business, or other persons involved in management of the business financies, may be held personally liable for the refund of the deposit.

Payment
Rights and Duties

Effective October 1 2019, the new amendments per section 6.4 the Construction Act, R.S.O. c. C.30 took effect including the duty to pay invoices from general contractors within twenty-eight (28) days of receipt unless genuinely disputing the validity of the invoice.  Specifically, the Construction Act says:

6.4 (1) Subject to the giving of a notice of non-payment under subsection (2), an owner shall pay the amount payable under a proper invoice no later than 28 days after receiving the proper invoice from the contractor.

However, the recent suspension of various timelines and deadlines per the recent emergency Order in Council 518/2020 as is O. Reg. 73/20 to the Emergency Management and Civil Protection Act, R.S.O. 1990, c. E.9, including limitation periods, among other things, without providing clarifying definitions, could pose some concern and cause for disputes whereas a possible interpretation is that the undefined term "limitation periods", includes the twenty-eight (28) day payment deadline within the Construction Act.  Specifically, the Order states, in part:

Whereas an emergency has been declared pursuant to Order in Council 518/2020 (Ontario Regulation 50/20) on March 17, 2020 at 7:30 a.m. Toronto time pursuant to section 7.0.1 of the Emergency Management and Civil Protection Act (the “Act”);

And Whereas the criteria set out in subsection 7.1 (2) of the Act have been satisfied;

Now Therefore, an Order is made pursuant to subsection 7.1 (2) of the Act, the terms of which Order are the following:

1. Any provision of any statute, regulation, rule, by-law or order of the Government of Ontario establishing any limitation period shall be suspended for the duration of the emergency, and the suspension shall be retroactive to Monday, March 16, 2020.

While legal practitioners have a good idea of what the government intends when referring to a "limitation period", it is quite possible that the issue remains within the possibility of legal debate.  Furthermore, the general public may view the term "limitation period", again as undefined within the Order in Council per the Emergency Management and Civil Protection Act, as referring to the twenty-eight (28) day payment deadline within the Construction Act.  Such a possibility will certainly be frustrating and aggravating of financial difficulties to contractors who may find payment for invoiced work lawfully suspended; or at the least, quite debatable as to whether the payment deadline is currently applicable.

Summary Comment

The Frustrated Contracts Act and the Consumer Protection Act, 2002, may currently provide for the nullification of obligations to fulfill contractual obligations or the complete cancellation of construction and renovation projects where terms, such as project commencement dates, are made impossible due to the government mandates requiring the closure or suspension of operations of various non-essential businesses.  Where contract obligations are nullified or terminated by operation of these laws, or others, without fault of the parties to the contracts, the parties should treat the contract as if never existing; and accordingly, any deposits or prepaid monies should be returned.  However, if partial performance such as delivery of materials or supplies, or design efforts, or even partial construction occurred, prior to the nullification of obligations or contractual cancellation, partial payment on a quantum meruit basis may be required.

An addition concern affecting contractors and customers is the Order in Council per the Emergency Management and Civil Protection Act and whether the twenty-eight (28) day payment requirement per the Construction Act is currently suspended.

Ultimately, the Covid19 crisis provides fodder for many unprecedented legal issues that will, unfortunately, give rise to many disputes and legal proceedings once the crisis passes.


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