THE LEGALITY OF AN INCREASE IN THE AGREED-UPON PRICE IN REAL ESTATE LAW AND CONSTRUCTION LAW

THE LEGALITY OF AN INCREASE IN THE AGREED-UPON PRICE IN REAL ESTATE LAW AND CONSTRUCTION LAW

Are you planning to construct a building or carry out renovations to your property, or on the contrary, are you a contractor operating in the construction or renovation field? During the execution of a contract, specific circumstances, such as a significant increase in material costs, may render the agreed-upon price non-representative of the work to be performed in the eyes of the contractor. Is it possible for the contractor to proportionally adjust the price in such a situation?

Mr Olivier Martineau from La Boîte Juridique specifies that it all depends on the agreement in place. “It cannot be emphasized enough that a clear and detailed written agreement is always better than a verbal contract, and it is when unforeseen events occur that this becomes apparent,” he highlights.

In the construction industry, there are mainly three methods of establishing the price of work. The price may be determined based on the work performed and adjusted on the spot according to any particular circumstances that may have arisen. Another method used by contractors is fixing a lump-sum price, meaning a fixed price established in advance. Another option is to provide the client with a detailed estimate of the cost of the work.

What happens when COVID comes into play and causes a surge in material costs?

The Civil Code of Quebec governs contracts, but its application regarding the “COVID effect,” which seems to be the cause of all woes for some time, raises certain legal questions.

In the case of a fixed-price contract, it will be difficult, if not impossible, for the contractor to increase the final price using COVID as justification, unless a clause allows it. The general principle is that the client pays the price established initially. However, a simple general clause allowing a price increase will not be sufficient. It must include certain criteria, such as conditions justifying the increase, and also set a ceiling for how far it can extend.

It is especially when the price of the work was estimated at the conclusion of the contract that certain questions may arise. The Civil Code of Quebec allows an increase in the estimated price in these cases when the contractor can justify the unforeseeability of the circumstances that caused it. The case law, equating this unforeseeability to force majeure, establishes the criteria for this justification. “It is the responsibility of the contractor to demonstrate the unforeseeability of the cause of the price increase and to unequivocally establish the circumstances under which it was impossible to foresee this increase — the criterion of unforeseeability is, therefore, the key,” explains Me Martineau.

COVID as Force Majeure

“The unpredictability of COVID could, depending on the circumstances, resemble force majeure. It is a case-by-case scenario. The date on which the agreement was reached would be decisive, and attributing a price increase to the COVID effect could carry more weight in the case of a contract concluded in March 2020 than in the case of a contract concluded in March 2021, after a year of the pandemic,” says the lawyer.

A practice that can help the contractor avoid such a situation of uncertainty is to anticipate, when preparing the estimate, an increase representing the trend followed by the increase in the cost of materials at the time of contract conclusion. The client can then choose to accept or reject the offered price, consenting to an adjustment of the work price based on the cost of materials. One could even include a maximum percentage increase in the event of a force majeure.

And for the sale of a new building

Regarding the sale agreement of a new building, the general rule provides that the agreed-upon price will be the price paid. However, a clause like the one described above for a fixed-price contract can be integrated into a sales agreement, allowing for an increase in the price, though not exempting the contractor from the obligation to justify such an increase.

At times, the contractor may attempt to raise the sale price without including a clause in the agreement. In such cases, the client must remain vigilant and not accept this increase for fear of seeing the building sold to a third party. Conversely, a contractor may face challenges in convincing the client to accept a price increase, even if it is legal. Nevertheless, there are remedies available to protect the rights of both parties.

WARNING: The information contained in this article, while of a legal nature, does not constitute legal advice. It is recommended to consult with a professional for advice that will address your specific situation.