REASONS FOR JUDGMENT

A. INTRODUCTION

[1] This is an appeal by the defendants from a decision of Howden J. dated March 19, 2014[^1] after an 11-day trial of a construction lien claim brought by Rob Marchand Construction Ltd. (“RMCL”). The defendants, Blaine and Barbara Jean Scott, owned a home in Midland and retained RMCL to undertake an extensive renovation. Construction began in May 2010, but ceased in late November when the parties had a falling out. Each party accused the other of breaching the contract. RMCL sought damages of $35,386.26. The Scotts denied liability and counterclaimed for $84,810.05 (the cost to complete the construction and remedy deficiencies) plus $26,955.96 (for extended living expenses while the remedial work was being done).

[2] The trial judge found that the Scotts breached the contract and awarded damages to RMCL in the amount of $19,978. Further, he ordered the Scotts to pay costs in the amount of $55,000.

[3] For the detailed reasonsthat follow, I have concluded that the trial judge’s finding that the Scotts breached the contract is tainted by fundamental errors that are palpable and overriding. As such, his conclusion that the Scotts breached the contract cannot stand and is set aside. Based on the evidence at trial and the findings of the trial judge that are not affected by the errors made, I find that the contract was breached by RMCL. That conclusion is substituted for the conclusion reached by the trial judge. The trial judge also erred in law in ruling that RMCL had not improperly charged HST to the Scotts on top of the HST already charged by subcontractors. That conclusion is also set aside. A new trial is required on the issue of damages.

B. STANDARD OF REVIEW

[4] The parties recognize that the standard of review, as established by the Supreme Court of Canada in Housen v. Nikolaisen,[^2] is correctness for questions of law and “palpable and overriding error” for questions of fact or mixed fact and law.

[5] For pure questions of law, the appellate court is free to replace the trial judge’s ruling with its own opinion on the law. For questions of mixed fact and law, where the legal issue can be extricated from the facts, the standard is also correctness. However, where the legal and factual issues are inextricably linked, the standard of review is the same as for pure questions of fact. The trial judge’s findings are entitled to deference and can only be overruled if there is a palpable and overriding error. In Housen, the Court described a palpable error as one that is “clear to the mind or plain to see.” Similarly, in H.L. v. Canada (Attorney General),[^3] Fish J. held (at para. 55):

. . . [A]n appellate court will not interfere with the trial judge’s findings of fact unless it can plainly identify the imputed error, and that error is shown to have affected the result.

[6] To the extent there is any disagreement between the parties on the standard of review, it is only with respect to the whether a particular issue should be characterizes as pure fact, or mixed fact and law, and if the latter, the legal issues can be extricated from the facts so as to attract the correctness standard of review.

C. THE TERMS OF THE CONTRACT

[7] It was common ground between the parties that although the contract between them was partially in writing, some elements of it were oral. This was not a standard-form type agreement. There were some building plans provided by the Scotts, a written quote submitted by RMCL and other details that were not committed to writing at all. The trial judge’s decision as to the scope and terms of the contract was therefore a question of mixed fact and law.

[8] The trial judge correctly identified the legal principles to be applied in deciding the terms of the contract. He considered the factual matrix in which the contract was formed, the words and conduct of the parties before, at the time of, and after the initial meeting of the minds, and the intention of the parties. The approach he took to determining the contract is correct in law.

[9] The trial judge then applied those principles to reach a conclusion as to the scope and terms of the contract. In this case, to the extent there were other legal issues involved in interpreting the contract, they are inextricably interwoven with the facts. Accordingly, the higher standard of palpable and overriding error applies.

[10] I find no error by the trial judge with respect to his determination as to the nature and terms of the contract between the parties. His analysis in that regard, from paragraphs 11-24 of the decision, is a careful consideration of all of the evidence before him. All of the findings made by the trial judge are rooted in the evidence and written communications between the parties. His conclusions are reasonable. I see no basis to interfere. Therefore, for purposes of this appeal, the contract terms are as determined by the trial judge, the key components being as follows:

RMCL, owned by Rob Marchand, was to be the general contractor on the renovation project.
The written portion of the contract consisted of a 10-page quote from RMCL dated May 3, 2010, to which was attached the 12-page building plans prepared by a third party building design firm.
RMCL agreed to provide all of the labour and materials for the work set out in the quote for a contract price of $259,345.
It was understood that this would not be the full scope of the work required as many of the finishings had not yet been selected by the Scotts and modifications would be made from time to time as the work progressed.
The Scotts were to pay a down payment of 10%, which was rounded to $30,000.
Thereafter, progress payments were to be made from time to time as the work proceeded. There was no specific agreement as to when those progress payments were required or how they were to be calculated. They were to be paid as invoiced by RMCL. There was no agreement that the payments were tied to stages of the building or added value.
It was understood by the parties that the Scotts could not live in the house while the renovations were ongoing and would be renting other accommodation.
There was no fixed date set for completion. Mr. Marchand predicted the renovation would be complete by the end of August or September, but did not commit to finish by that time.

D. WHO BREACHED THE CONTRACT?

Findings of the Trial Judge

[11] The trial judge found that the contract was breached by the Scotts.

[12] Towards the end of October 2010, there were difficulties between the parties. However, matters came to a head after Mr. Marchand delivered a written invoice requiring a further progress payment of $20,000.00. The invoice was dated November 10, but delivered to the Scotts on November 15. The invoice stated that the remainder of the contract price was $42,914 (with HST), that attic insulation, soffit/fascia work, drywall, second floor and site cleanup had been done since the last invoice, and that remaining to be done were main floor and kitchen drywall, electrical panel installation and drywall moulding and sanding.

[13] The trial judge found as a fact that after receipt of this invoice, Mr. Scott told Mr. Marchand that he had run out of money. The trial judge stated that he relied upon the evidence of Mr. Marchand in that regard, referring to that evidence six times (at paragraphs 49, 51, 67, 72 and 73 of the Reasons). The trial judge further found that Mr. Scott’s oral statement was confirmed in a November 21^st email from Mr. Scott to Mr. Marchand in which Mr. Scott stated, “I’ll let you know as soon as I know, when I have another $20,000.” In that same email, Mr. Scott raised for the first time his obligation under the Construction Lien Act to hold back 10% of the contract price for 45 days after substantial completion, and that the progress payment now being demanded interfered with the holdback. The trial judge held that this reference by Mr. Scott to the holdback was a “red herring” and that if the Scotts had been serious they would have paid the amount of the progress payment less the amount of the holdback.[^4]

[14] The last work done by RMCL on the project was on November 19, 2010. There was a heated meeting on site between Mr. Marchand and Mr. Scott on either November 22 or 23. RMCL proceeded to remove all of its equipment and materials from the site. In a conversation with Mrs. Scott on November 23, Mr. Marchand repeated that he would do no further work without payment. Mrs. Scott raised the possibility of their paying the money to a lawyer to be held in trust. Mr. Marchand was interested in that proposal. On November 26, 2010, Mr. Scott confirmed in an email that the funds would be in the hands of their lawyer that day and that any amount in excess of the holdback would be “available immediately.” However, Mr. Marchand heard nothing further for several days.

[15] On November 25, 2010, RMCL registered a claim for a lien in the amount of $35,386.00. On December 1, RMCL’s lawyer sent a letter to Mr. Scott advising of the lien registration and stating that the contract was terminated. The trial judge held that although this letter stated that the contract was terminated, it also stated it “could be reinstated by payment.”[^5] He also held that the letter stipulated that “the contract can be reinstated on meeting certain terms.”[^6] The trial judge referred to Mr. Marchand’s evidence that he was still ready to complete the contract and that he had not instructed his lawyer to terminate it. The trial judge described the December 1 letter as having “been written to impress the Scotts with the seriousness of the situation and to negotiate terms to resolve the issue of the interim payment.”[^7]

[16] The Scotts’ lawyer responded by letter dated December 6, 2010 indicating he was holding $14,611.02 in trust, which would be paid to RMCL upon confirmation of the completion of 10 items that were listed. He advised that the balance of the $20,000 progress draw represented a statutory holdback and would be released 45 days after completion of the project.

[17] RMCL’s lawyers responded with a counter-proposal on December 7, 2010. RMCL proposed doing the work listed, but required that the entire amount outstanding under the contract must first be paid to counsel to be held in trust, including payment for work not yet done and all holdback amounts. Under the proposal, as soon as the 10 items were completed (subject to Ontario Hydro attendance), payment of $7,847.63 would be released to RMCL. Confirmation was required that the Scotts’ lawyer was holding holdback funds in the amount of $27,538.63. Further, the letter stated that RMCL would be willing to reinstate the contract and complete the balance of the work provided that the Scotts’ lawyer confirmed he was holding a further $12,995.00 representing the value of the work yet to be done.

[18] The Scotts did not respond immediately to this proposal. Their lawyer sent a letter on January 13, 2011 stating that the proposal was rejected and that the Scotts would be having the work completed by another contractor.

[19] The trial judge held that the contract between the parties had no set terms to determine how interim payments were to be calculated. He stated that when the conflict developed over the November 10, 2010 progress payment invoice, it was therefore “the duty of the parties to act reasonably to attempt to resolve the problem.” He relied for this conclusion on decisions of Master Sandler and Master Albert in construction lien actions.[^8]

[20] The trial judge concluded that the Scotts had not acted reasonably, citing the failure of the Scotts to respond in a timely way to Mr. Marchand’s willingness to consider payment in trust, and their failure to permit Mr. Marchand to complete the work without any reasonable response to the counter-proposal in the December 7, 2010 letter.[^9] The trial judge noted that “hovering in the background” was the oral and written statements by Mr. Scott that they had run out of money, making it reasonable to require all of the monies under the contract to be paid into trust in advance as security. He held, at para. 72 :

. . . It seems to me that the Scotts’ sudden withdrawal from, and then refusal to attempt, further negotiations in view of the closeness of the parties to a workable solution, showed no real effort to act in accordance with their duty in law in these circumstances. On the evidence which I accept from Mr. Marchand and on all the evidence including the documentary record, it was entirely reasonable in the circumstances for Mr. Marchand to insist on security for payment of the work done and then, if to complete the contract work, for the estimated balance of the contract.

[21] And further at para. 73:

In my view, the failure of the Scotts to engage in serious negotiations in a timely way and then at all is not acting reasonably toward a possible solution to the lacuna in the contract over progress payment terms. I find that the contract was breached by the Scotts’ refusal to pay the progress payment and by their refusal to act reasonably thereafter. The use of the holdback provision to justify their initial refusal is a red herring. If they were serious, they would have paid the amount of the progress payment less a proportion of the holdback funds required on the total project. I accept Mr. Marchand’s evidence and the statement in Mr. Scott’s email of November 21, 2010, that they had run out of funds and were not sure if they could get access to more in order to complete the contract. Their payment in trust did not even secure the balance of the funds required by the contract so that timing of release to the contractor could be meaningfully considered.

[22] Having found that the Scotts breached the contract, the trial judge turned to consider the quantification of the damages claimed by RMCL. RMCL had claimed there was $35,583.00 owing. However, the trial judge found that once work not done or work that had to be remediated were taken into account, the amount owing to RMCL (not including interest) was $19,978.00.

Analysis: Misapprehension of evidence as to the Scotts “running out of funds”

[23] The trial judge relied upon the evidence of Mr. Marchand that Mr. Scott had told him before his November 21, 2010 email that he had “run out of money.” This is a fundamental misapprehension of the evidence at trial. Mr. Marchand did not say Mr. Scott told him that. Both counsel conceded in argument before this Court that there was no such evidence at trial. Indeed, there was no evidence at trial from either Mr. Marchand or the Scotts about the Scotts having run out of money.

[24] In his evidence-in chief at trial, Blaine Scott testified that upon receiving the November 10 invoice for a further progress payment of $20,000, he had concerns about the fact that they had recently made a $30,000 progress payment and he felt little work had been done after that date. He was also concerned that there was more work remaining to be done than was shown on the invoice and that some of the work stated to have been done was not in fact completed. Finally, he was also concerned that given the work left to be done, a payment of $20,000 would violate the Construction Lien Act requirement of holding back 10%. It was not suggested to Mr. Scott in cross-examination that the holdback requirement was not a bona fide concern, nor was it suggested to him that he had run out of money or that he told Mr. Marchand he had run out of money.

[25] Not only was there no evidence that the Scotts were out of funds in November 2010, all of the indications are to the contrary. As of mid-November, 2010, when the dispute about the progress payment arose, the Scotts had made the following payments, all within days of a receiving an invoice (for a total of $283,697.84):

May 4, 2010 – initial deposit: $30,000 May 31, 2010 – progress payment: $30,000 June 11, 2010 – progress payment: $30,000 June 29, 2010 – progress payment: $30,000 July 13, 2010 – progress payment: $30,000 August 2, 2010 – progress payment: $30,000 September 20, 2010 – progress payment: $30,000 October 23, 2010 – progress payment: $30,000 May – November 10, 2010 – extras: $43,697.84

[26] In addition, on Friday, November 26, 2010, the Scotts deposited $14,611.02 in trust with their solicitor, being the portion of the $20,000 remaining after the amount required for the construction lien holdback. Further, after RMCL stopped working on the project, the Scotts had the construction completed by other contractors, for which they paid in excess of $150,000.00.

[27] Accordingly, the trial judge’s finding that Mr. Scott had told Mr. Marchand that he was out of funds is wholly unsupported by the evidence. This is a fundamental misapprehension of the evidence on a point pivotal to his determination as to who breached the contract. As such it is a palpable and overriding error of the type warranting appellate intervention.

Analysis: Misapprehension of evidence as to Mr. Scott’s November 21 email

[28] The trial judge found that Mr. Scott first made the oral statement about being out of money and then confirmed this in writing in his email of November 21, 2010. As noted above, there is no evidence of an oral statement. Therefore, the email does not confirm any such statement. It must stand on its own.

[29] The trial judge quoted only one sentence of the email: “I’ll let you know as soon as I know, when I have another $20,000.” This is the very last sentence of the email. All of the rest of the email deals with the construction lien holdback requirements. Mr. Marchand was questioned about his understanding of this email in his evidence-in-chief. He testified that he was surprised to see the reference to the Construction Lien Act, which he said they had never once discussed and was not part of the contract. He further said that he does not bother with holdbacks unless he is doing work on a municipal or government project. As for the last sentence, Mr. Marchand testified:[^10]

I mean it clear, it clearly shows me that he knows he owes me the 20 or he wouldn’t say that he has the 20 to begin with. It’s stating here, best I can read, he’s going to let me know when the $20 K’s coming. That’s the way I take it.

[30] Mr. Marchand replied to the November 21 email at 9:36 a.m. the next morning, stating that he would drop by on 3:00 to see if he could pick up a cheque then. It does not appear that Mr. Marchand was interpreting the November 21 email as an indication that the Scotts had run out of money. He certainly did not say so, either in emails at the time or at trial. However, even if that was Mr. Marchand’s subjective view, it does not make it a rational inference from the statements made, particularly in the absence of any prior statements by Mr. Scott to which the email could be making reference.

[31] At best, the language used in the email is ambiguous. Taken by itself, it is not a clear statement that the Scotts have run out of money. Other interpretations are possible. In my view, the trial judge misapprehended the evidence with respect to the context in which this email was sent and therefore drew inferences from the words used that are not rationally supported by the evidence. Again, this point was pivotal to findings made by the trial judge as to who breached the contract. I find this to be a palpable and overriding error.

Analysis: Mischaracterization of December 1, 2010 letter

[32] Mr. Marchand testified that after receiving the November 21 email, he spoke to his lawyer. He believed this would have been Monday, November 22. He said that his lawyer told him to remove all of his materials from the worksite, and he did so. At that same time he had an angry confrontation with Mr. Scott, and later a telephone conversation with Mrs. Scott in which she was very upset that he was stopping work on the project. He testified that she suggested that they arrange for payment of the money to their lawyer to be held in trust and he was prepared to consider such an option. It seems that this conversation must have been on November 23, 2010.

[33] Meanwhile, Mr. Marchand had removed all of his equipment and materials from the house. On October 24, 2010 he signed the necessary documents at his lawyer’s office and on November 25, 2010, his lawyer registered a construction lien on title. Mr. Scott advised him on November 26, 2010 that he was depositing the funds with his lawyer that same day. Mr. Scott told him that the amount not subject to the holdback provisions (approximately $14,000) would be available for release immediately. Mr. Marchand acknowledges that he said nothing to Mr. Scott at that time about the lien having already been filed.

[34] On December 1, RMCL’s lawyer wrote to Mr. Scott. The trial judge characterized this letter as being “written to impress the Scotts with the seriousness of the situation and to negotiate the terms to resolve the issue of the interim payment.”[^11] He stated that the letter advised the Scotts that “the contract was terminated but could be reinstated by payment”[^12] and that “the contract can be reinstated on meeting certain terms.”[^13]

[35] The December 1 letter was an exhibit at trial. Although Mr. Marchand testified that he did not instruct his lawyer to terminate the contract, it is clear from the evidence that the Scotts were never told that this letter had been sent in error, or that its intent was merely to impress upon them the seriousness of the situation. The letter speaks for itself. It is unequivocal. It terminated the contract.

[36] In the letter, RMCL’s lawyer referred to the contract under which RMCL had provided materials and services for the construction project on the Scotts’ home. The letter then stated:

As my client has not been paid for the work and materials completed and delivered in accordance with the terms of the contract, he has instructed us to register a lien on the property in the amount of $35,386.25 plus interest and costs. Enclosed please find a copy of the Claim for Lien registered in the Registry Office for the County of Simcoe on November 25, 2010 as instrument number SC867994.

As a result of your breach of the contract terms, my client has elected to terminate the contract and not to proceed with the work remaining under the contract.

If we are not in receipt of certified funds made payable to our firm in trust in the amount of $35,386.26 plus an additional $750.00 for legal costs within 14 days of the date of this letter, we will seek instructions to proceed with the lien action and will be claiming further costs against you.

[37] With the greatest of respect to the trial judge, in my view, his findings with respect to this letter cannot be said to be reasonable, even when seen in the context of the facts as he had found them. There is nothing in this letter to indicate that the contract may be “reinstated upon payment,” nor that it may be “reinstated on terms.” Rather, the letter states that the contract is terminated, no further work will be done on the premises, and that unless full payment of the lien amount plus costs is not paid within 14 days, the action will proceed and greater costs will proceed. There is nothing in the letter to suggest that it seeks to “negotiate terms to resolve the issue of the interim payment,” as found by the trial judge. The interim payment issue is not even mentioned. There is no suggestion of further negotiations or any terms upon which a resolution might be reached. The letter, quite plainly and straightforwardly, terminates the contract. That being so, in my view, the question for the trial judge at that point ought to have been whether RMCL had proper grounds to terminate the contract as of December 1 because of a breach of contract by the Scotts. The question was not whether the Scotts, after receipt of that December 1 letter, acted reasonably in order to resolve the matter. That question might be relevant to mitigation of damages, but it cannot be relevant to who breached the contract.

[38] The trial judge’s characterization of the letter is clearly wrong. It is a further palpable and overriding error.

Analysis: Reasonableness of the Scotts’ position

[39] The trial judge found that there was no specific provision in the contract as to when progress payments would be payable and in what amount. He concluded that the parties had a responsibility to act reasonably to attempt to resolve the problem of the November 2010 progress payment of $20,000. I have no difficulty with that general proposition. However, the trial judge’s conclusions as to who acted reasonably and who did not are undermined by the errors I have dealt with above as to whether the Scotts had run out of money or said that they had run out of money, whether the position taken with respect to the lien holdback was genuine, and whether the December 1 letter from RMCL’s lawyer terminated the contract.

[40] I have considerable difficulty with the trial judge dismissing the lien holdback as a “red herring.” It is a legal requirement that there be a 10% holdback. Mr. Marchand knew that to be the case because of his work on municipal and government projects where the terms of the Construction Lien Act were respected. He testified that it was not his “practice” to follow the legislative requirements for other construction projects. However, the 10% holdback is a requirement imposed by statute for the benefit of subcontractors, of whom there were several on this project. It does not matter what Mr. Marchand’s habits were, nor does it matter that there was no specific provision in the contract dealing with holdbacks. Section 5(1) of the Construction Lien Act specifically provides that every contract or subcontract related to an improvement is “deemed to be amended in so far as is necessary to be in conformity with this Act. Further, even if the parties had attempted to waive this requirement of compliance with the legislation, under s. 4 of the Act, such a provision would be void.[^14] It is clear the legislation takes priority over any contract to the contrary.

[41] It was appropriate for Mr. Scott to raise the holdback issue, and it was appropriate for Mr. Scott to have withheld the amount he proposed. This position is confirmed in the letter from the Scotts’ lawyer to RMCL’s lawyer on December 6, and appears to have been accepted by the solicitor for RMCL in his December 7 response.

[42] The trial judge erred in law by characterizing this legal requirement as a “red herring.” He also was under a fundamental misapprehension of the facts with respect to whether the Scotts were out of money and using the holdback provisions as some sort of excuse for not paying, as I have referred to above. Accordingly, the Scotts cannot be said to have acted unreasonably in respect of the holdback amount, nor can their failure to remit this amount to RMCL in breach of the statute be characterized as a breach of contract.

[43] With respect to the remaining amount, the Scotts paid those funds to their lawyer in trust, as they stated on November 23 and on November 26 that they would do. Meanwhile, RMCL stopped all work on the project, removed all of their equipment and materials, filed a lien claim, and sent a lawyer’s letter terminating the contract and seeking damages. I cannot understand how, in this context, the Scotts can be said to have acted unreasonably, nor that RMCL can be said to have acted reasonably.

[44] Even after RMCL (through its lawyer) terminated the contract, the Scotts responded by their lawyers’ letter dated December 6, 2010 offering a solution. They proposed that the $14,000 held by their lawyer be released upon a list of 10 items being completed by RMCL and the balance of the $20,000 would be the holdback, not payable until 45 days after completion. RMCL’s lawyer responded on December 7, essentially agreeing to the 10 items, proposing that $7,847.63 be paid to RMCL upon completion of those items, and agreeing to the holdback requirement. However, in that letter, the value of the work done to date was stated to be $275,386.26, such that the holdback requirement would be $27,538.63. The value of the work yet to be done was stipulated to be $12,995.00. RMCL agreed to “reinstate” the contract and complete all work provided that the Scotts pay into trust in advance the sum of $48,831.26, representing the amounts due upon completion of the 10 items, the 10% holdback and the full amount of the work yet to be done. The Scotts sought an expert opinion and the cost of what still needed to be done and remedial work required. On January 13, 2011, they rejected the December 7, 2010 counter-offer.

[45] The trial judge found that the Scotts acted unreasonably in doing so. He held that it was “entirely reasonable” for RMCL to insist on security for all payment, past, present and future. This latter conclusion is rooted in the trial judge’s erroneous finding that the Scotts were out of money and had failed to make the $20,000 payment for that reason. As such, it too is erroneous.

[46] The trial judge further held that the Scotts’ “sudden withdrawal from, and then refusal to attempt, further negotiations . . . showed no real effort to act in accordance with their duty in law in these circumstances.” This conclusion is coloured by the Trial judge’s prior determination that the December 1 letter from RMCL’s lawyer did not terminate the contract. As previously stated, I also find this to be erroneous.

[47] It must also be noted that the Scotts had raised legitimate concerns about the quality of the work done, remedial work required and the amount of work yet to be done under the contract. Having determined that the Scotts breached the contract, the trial judge went on to consider the amount to which RMCL was entitled for the work already done on the contract and reduced its claim from $35,000 to $19,000, finding in the Scotts’ favour with respect to a number of the issues they had raised in November 2010 as being problematic. The proposal by RMCL was that the Scotts post as security the $45,000 to be paid out upon completion. RMCL received less than $20,000 for the work done. Even if the value of the work required to complete the contract was approximately $13,000 (as claimed by RMCL in the December 6 letter), the proposed settlement is close to double what RMCL was entitled to. The Scotts' rejection of such a proposal cannot be said to be unreasonable. In any event, as I have already stated, RMCL had already terminated the contract. These discussions were by way of settlement or mitigation of damages. They cannot be properly characterized as breach of contract by the Scotts.

Conclusion: Who breached the contract?

[48] In my view, once these fundamental errors by the trial judge are removed, the situation is as follows:

(i) RMCL delivered an invoice for $20,000 on November 15, 2010.

(ii) There was no agreement between the parties about the amount or timing of progress payments, nor when invoices for progress payments were payable.

(iii) There had been no prior default or delay in payment by the Scotts, the contract was nearing completion, and they had already paid $283,697.84 to RMCL.

(iv) In response to the November invoice, the Scotts raised legitimate concerns about the work done and work yet to be done and pointed out the holdback requirements of binding legislation making it improper to pay the full amount requested.

(v) On November 23, 2010, the Scotts proposed arranging to pay the disputed amount (other than the holdback) into trust with their lawyer, and paid that amount into their lawyer’s trust account on November 26, 2010.

(vi) RMCL responded by stopping work, removing its material and equipment, filing a lien, and sending a letter stating that because the Scotts had breached the terms of the agreement, it was terminating the contract.

(vii) RMCL terminated the contract within 15 days of the delivery of the invoice.

(viii) The Scotts were successful at trial in reducing the amount claimed by RMCL as owing under the contract as of December 1, 2010 from $35,000 to $19,000, supporting the legitimacy of their concerns about the amount of the payment claimed by RMCL at that time.

[49] These are all findings made by the trial judge. Once the palpable errors in the trial judge’s reasoning are removed, these are the findings of fact relevant to who breached the contract. I find the trial judge’s conclusion that the Scotts breached the contract to be overwhelmingly against the evidence and unsustainable. It was RMCL and Mr. Marchand who acted precipitously and preemptively by terminating the contract in the face of a reasonable position taken by the Scotts, which position was also vindicated by the damages findings at trial. It was RMCL that breached the contract.

E. CONCLUSION AND ORDER

[50] The trial judge’s conclusion that the Scotts breached the contract cannot stand as it is tainted by palpable and overriding errors and misapprehensions of the evidence. Based on the factual findings that are not affected by these errors, I find that the contract was breached by RMCL.

[51] Given that conclusion, I have considered whether the other findings of fact made by the trial judge with respect to damages can stand. With some considerable reluctance, I find that they cannot. The approach to the calculation of damages due to the Scotts as a result of the builder’s breach of contract is fundamentally different to the approach that was appropriately taken based on the breach having been by the Scotts. While some of the factual determinations will therefore have to be reassessed, it is not possible to go through each heading of damages and set-off and determine which ones can remain and which ones will have to be redone. The only effective remedy is to order a new trial with respect to damages.

[52] Having said that, there is one issue in relation to the damages which I find to be an error of law that needs correction. It is clear from the invoices rendered by RMCL that when a subcontractor issued an invoice to RMCL, this was passed on to the owners with a 15% markup across the board. That 15% markup was applied not only to the labour and cost of materials, it was calculated on the entire accounts of the subtrades, including those portions of the accounts that were for HST and GST. Thus, RMCL was charging an additional 15% on top of the GST and HST paid by the subtrades, in effect collecting a commission on taxes paid to the government. The trial judge held (at para 93) that the contractor was entitled to charge a mark-up for his administrative costs and was entitled to charge a mark-up that is similar to the tax rate. That is correct. However, the contractor is not entitled to charge an additional 15% markup to the tax amount in those subcontractors’ bills. Such a charge is improper. The trial judge erred in law in failing to allow a credit to the Scotts for such overcharges. The actual calculation of such overcharges is left to the trial judge on the damages trial.

[53] Accordingly, the Order of Howden J. dated March 19, 2014 is set aside. An order shall issue finding RMCL to have breached the contract by terminating same on December 1, 2010. There shall be a trial of an issue on the damages due to the Scotts as a result of that breach, subject to any set-off due to RMCL for work done for which it has not yet been paid.

[54] The issue of costs (both of the appeal and initial trial) may be addressed in writing with written submissions from the Scotts within 20 days of the release of these reasons, and responding submissions within 10 days after receipt of the Scotts’ submission. A brief reply may be delivered within 5 days thereafter.

MOLLOY J.

REILLY J.

CORBETT J.

Released: January 20, 2016

CITATION: Rob Marchand Construction Ltd. v. Scott, 2016 ONSC 12

DIVISIONAL COURT FILE NO.: DC-14-00661-00

DATE: 20160120

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

REILLY, MOLLOY and CORBETT JJ.

BETWEEN:

ROB MARCHAND CONSTRUCTION LTD.

Plaintiff (Respondent)

– and –

BLAINE MATTHEW SCOTT and BARBARA JEAN SCOTT

Defendants (Appellants)

REASONS FOR JUDGMENT

Molloy J. / Divisional Court

Released: January 20, 2016

[^1]: 2014 ONSC 1712. [^2]: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235. [^3]: H.L. v. Canada (Attorney General), 2005 SCC 25. [^4]: Reasons of the trial judge, para. 73. [^5]: Reasons, para. 53. [^6]: Reasons, para. 52 [^7]: Reasons, para. 71 [^8]: Reasons, paras. 59-64. See Homewood Development Inc. v. 2010999 Ontario Inc., 2013 ONSC 4441, paras. 51, 66; Vallie Construction Inc. v. Minaker, 2011 ONSC 6565, paras. 156, 164. [^9]: Reasons, para. 71 [^10]: Transcript, November 12, 2013, page 72, line 30 – page 73, line 3. [^11]: Reasons, para. 71. [^12]: Reasons, para. 53; see also para. 58 [^13]: Reasons, para. 52. [^14]: Construction Lien Act, R.S.O. 1990, c. C.30.

Rob Marchand Construction Ltd. v. Scott, 2016 ONSC 12

Case Summary

REASONS FOR JUDGMENT

A. INTRODUCTION

B. STANDARD OF REVIEW

C. THE TERMS OF THE CONTRACT

D. WHO BREACHED THE CONTRACT?

Findings of the Trial Judge

Analysis: Misapprehension of evidence as to the Scotts “running out of funds”

Analysis: Misapprehension of evidence as to Mr. Scott’s November 21 email

Analysis: Mischaracterization of December 1, 2010 letter

Analysis: Reasonableness of the Scotts’ position

Conclusion: Who breached the contract?

E. CONCLUSION AND ORDER

Judges

Counsel

Parties

Areas of Law

Fact Patterns

Financial Outcomes

Issues

Statutory Provisions 2

Legal Tests 1

Legislation 1