In Sjostrom Sheet Metal Ltd. v. Geo A. Kelson Company Limited, 2023 ONSC 4959, the Ontario Superior Court of Justice affirmed several key legal principles, including the importance of carefully drafted pleadings, the validity of oral contracts, the significance of good record-keeping in quantifying damages, adherence to contractual default notice provisions, and the consequences that may flow from ambiguous or incomplete change orders.
This matter involved two actions arising out of a construction project whereby University Health Network ("UHN") hired Canadian Turner Construction Company Ltd. ("Turner") as the general contractor to build the UHN Centre for Cell & Vector Production ("CCVP") in Toronto. Turner subcontracted with Geo A. Kelson Company Limited ("Kelson") for the mechanical scope of work. Kelson further subcontracted with A. Amar and associates Ltd. ("Amar") to perform certain sheet metal work. Amar hired labourers from Sjostrom Sheet Metal Ltd. ("Sjostrom") to assist with completion of certain sheet metal work.
Sjostrom abandoned the project when Amar stopped paying. Kelson contacted Sjostrom and asked them to return to site to complete the remaining sheet metal work, making direct payments to Sjostrom. Kelson issued a change order reducing Amar's subcontract price.
Sjostrom liened and commenced an action for amounts it claimed it was owed by Kelson. Kelson took the position that it did not have a contract with Sjostrom and was therefore not liable for the amounts claimed. Instead, Amar was required to pay Sjostrom for any amounts owing. Kelson counterclaimed against Amar for damages, and for contribution and indemnity, in the event it was liable to Sjostrom in the action.
In its decision, the Court considered the following:
- The alleged agreement between Sjostrom and Kelson;
- The amounts claimed by Sjostrom;
- The impact of a change order on Amar's scope of work; and
- The alleged breach of the subcontract between Kelson and Amar.
The Importance of Careful Pleadings
The Court found that Kelson entered into a valid separate direct sub-subcontract with Sjostrom. Key to the Court's reasoning was the fact that Kelson made certain admissions in its Statement of Defence, pleading that it "decided to retain [Sjostrom] to complete Amar's Work directly" and that it "entered into an agreement with [Sjostrom] for [Sjostrom] to complete Amar's Work" and it was "forced to re-hire Amar to perform [Sjostrom's] scope of work".
The Court affirmed that Parties will be bound by the words of their pleadings.
Proving Damages based on Labour Time
The Court further found that Sjostrom and Kelson agreed that Sjostrom would be compensated on its actual hours spent completing sheet metal labour. Sjostrom bore the burden of proving the value of the services and materials it supplied. On this point, the Court found that Sjostrom's evidence was mostly hearsay, and held that Sjostrom did not meet its onus.
The only documentation Sjostrom relied on to support its invoices were weekly time summaries, that were not prepared or signed by the labourers themselves, and did not contain a description of the specific work performed. The Court determined that despite the timesheets being admissible as business records, in the absence of corroborating evidence, they had limited evidentiary value.
Clear and Unambiguous Change Orders
The parties were at odds about the contractual implications of the change order that Kelson issued to reduce Amar's subcontract price by $61,924.50. Kelson argued that the change order credited the amount against the sub-subcontract price but did not eliminate the sheet metal work from Amar's scope of work. Amar argued that it had removed the sheet metal work from the scope of work, which the Court agreed with. The change order deducted an estimated amount for future work to be performed by Sjostrom and paid by Kelson, at rates negotiated by Kelson without input or agreement from Amar, which was consistent with removing the scope of work from Amar's sub-subcontract. The change order expressly stated that it was subject to the terms and conditions in the original sub-subcontract, which contained an entire agreement clause and default notice requirements.
Contractual Notice Provisions
The Court held that Kelson breached its subcontract with Amar by failing to pay amounts owing. Additionally, Kelson did not provide written notice of default to Amar, arguing that it was not required to. The Court determined that Kelson's rights on default flowed from a default notice being given.
If Kelson had followed the terms of the Sub-subcontract and issued a notice of default, its right to back charge Amar may have been preserved. Here, however, because it did not, Kelson was limited to charging back to Amar the value of the Change Order.
Conclusion
While the Court found that Kelson entered into a direct agreement with Sjostrom to compensate Sjostrom on an hourly rate, the Court dismissed Sjostrom's claim and discharged its lien because it could not prove its quantum of damages. The Court held that Amar was entitled to judgment against Kelson.
This case provides helpful guidance to contracting parties when drafting contracts, as well as underscoring both the importance of compliance with notice provisions, and the importance of detailed and supported record keeping.
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