Does the increase in the cost of materials justify the contractor doing the same?

You have recently bought a new property at a certain price, but now at the time of delivery of the construction, your contractor announces a price higher than the initially agreed price and threatens to terminate the contract if you refuse to pay the new price. The reasons he gives you are classic, he is a victim of the drastic increase in the cost of materials and the shortage of labor related to the pandemic. Is he entitled to terminate the contract for such a reason? What are your rights and possible remedies?

First of all, it must be borne in mind that each case is a case in its own right and that the judge may have to rule differently depending on the circumstances surrounding the price increase.

However, good faith and contractual morality must prevail at all times and these concepts will necessarily guide the judge in his decision. Indeed, the contractor must always act with prudence and diligence in the best interest of his client and take all reasonable means to carry out the project at the advertised price and within the agreed deadlines. Thus, the fact that a contractor increases the selling price by taking advantage of the increase in the cost of materials is not in itself illegal, but the circumstances surrounding this increase may be.

In addition, the contractor must comply with several obligations throughout the performance of the contract, under penalty of incurring contractual liability.

 

• The obligation to inform (article 2102 et seq. of the C.C.Q.):

The contractor has the duty to provide any useful information to his client on the nature of the project, the resources and the time required to achieve the completion of the project.

This information must exist from the time the contract was signed and continue throughout its execution in order to allow the client to give informed consent to any stage of the project.

The contractor will therefore have to keep you informed in a timely manner of any foreseeable price increase. Thus, it is important to know whether at the time the contract was signed, the increase in the cost of materials was foreseeable, because if the answer is yes, this lack of information can be blamed on the contractor as constituting fraud.

However, you should know that the obligation to provide information is bilateral and that as a customer you must also inform yourself throughout the contract.

The APCHP (Association de la construction du Québec et de la corporation des entrepreneurs du Québec) acknowledged that the increase in material prices was significant and that the shortage of labour and materials was a source of delivery delays.

However, if the increase in the cost of materials was sudden, it can be estimated that by the end of 2020, a contractor is aware that increases in material costs as well as delivery delays are foreseeable. Thus, the contractor who has a contract signed today does so with full knowledge of the facts, taking into consideration the increase in the price of materials.

 

• The obligation to justify the increase in the announced cost:

The contractor who announces an increase has a duty to justify the increase and to demonstrate the unpredictability of the circumstances that caused the increase.

Thus, the contractor cannot arbitrarily set an increase without providing you with justification, under penalty of incurring liability. In the absence of proof, you are entitled to request such proof before accepting any increase.

 

What if the contractor has complied with his obligation to inform and justifies the requested increase? Is he entitled to unilaterally terminate the contract in the event of refusal to pay the new price without incurring liability?

The Civil Code provides that unilateral termination of the contract is only possible for serious cause and that such termination cannot be made at the wrong time (article 2126 CC.Q). To assess the serious reason, the court will take into consideration the events prior to the termination that justified the contractor’s decision. Case law considers that a serious reason is a situation or a state of affairs that was unforeseeable at the time of the conclusion of the contract and that does not depend on the personal will of the contractor or service provider. Thus, everything will depend on whether, at the time of the conclusion of the contract, the increase in the cost of materials or the delays in delivery were foreseeable. If the answer is yes, the entrepreneur will not be able to hide behind force majeure to invoke termination.

In addition, since the contractor must act in the best interests of his client, he cannot make a decision that is disproportionate to the circumstances that led to the increase during the course of the contract. He therefore has a duty to try to negotiate with his client before imposing a termination.

The contractor may not terminate the contract at an untimely or inopportune time, otherwise he may incur liability and be required to compensate the customer, even if there is a serious reason.

In any event, the burden of proof lies with the contractor. It is up to the contractor to prove that the requested increase is actually due and that the refusal for the customer to pay the price claimed constitutes a fault justifying the unilateral termination of the contract. Thus, the absence of proof demonstrating the validity of the claim makes the client’s refusal to pay the amount claimed valid and renders the contractor’s unilateral termination of the contract illegal and wrongful.

The compensation regime varies depending on whether the contract is terminated for serious cause or in the absence of serious cause and/or at an unreasonable time (articles 2126 et seq. of the C.C.Q.). In the first case, the contractor’s liability is limited to compensating the customer only in the event that an actual loss suffered was foreseeable at the time of termination. If the contract is terminated without serious reason and/or at an unreasonable time, this constitutes a breach of contract and the Contractor must compensate the Client for all damages suffered in connection with this termination.

Thus, if you refuse to agree to pay a price other than the initially agreed sale price and your contract is terminated, you have legal recourse against your contractor to claim damages.

 

Can you force the contractor to sell you the property at the price originally agreed?

The issue has not yet been decided in case law and will depend on the facts surrounding the increase. However, you have an obligation to mitigate your damages, which may require you to negotiate a reasonable increase in good faith based on the supporting documents provided.

Please note that if the contractor refuses to return the deposit to which you are entitled, the RCMP (Garantie de construction résidentiel) offers assistance in filing a complaint against your contractor for a maximum amount of $50,000. Your contractor is also required to attach the GCR contract to the contracts that require it.

In order to avoid surprises, the contractor must make sure to include “Price modification” clauses in his contract applicable to this type of situation. Such a clause will allow the contractor to modify the price by justifying the increase to his client if the latter agrees to sign any document modifying the price following the production of supporting documents. Naturally, a clause allowing your contractor to change the price for any reason will be declared abusive.

To conclude, we strongly advise you to read the clauses of your contract carefully and to keep yourself informed of all questions relating to price changes both when signing your contract and throughout its execution.