An Important Consideration When Settling Construction Disputes

There may be many disputes over the course of a residential construction project. These disputes are often resolved through negotiation and without resorting to litigation. However, if such disputes escalate and litigation is commenced, the parties to the dispute may quickly multiply as each party seeks to spread the blame for a problem among other participants in the project’s construction. For instance, a dispute between an owner and contractor may evolve when the contractor says the project’s architect, engineers, and subcontractors are liable for the owner’s problems. Those parties may be required to participate in the litigation despite having no contractual relationship with the project’s owner. The parties’ respective insurers and the project’s warranty provider may necessarily become involved in the dispute.

If a dispute is resolved, whether through litigation or by other means, the parties should execute (a) a settlement agreement which outlines the disputes being settled, and (b) a release to prevent each party from bringing further claims based on the same subject matter of dispute. When documenting a settlement, it is important to precisely set out those claims and parties against which the release is intended to apply. This is particularly important in the construction context, where the variety of parties and issues may create difficulties in documenting the settlement agreement and finally resolving all matters between all parties to the dispute.

The pitfalls which may be encountered in documenting the settlement of a residential construction dispute are demonstrated in the Supreme Court of British Columbia’s recent decision in G. Wilson Construction Co. Ltd. v. Westeinde, 2012 BCSC 1356.

The plaintiff in G. Wilson Construction was hired as general contractor to build a house for the defendant, Westeinde, in a property located in West Vancouver. The cost was originally estimated at $4.6 million but it rose to about $10 million in the course of construction. The plaintiff filed a claim of builders lien against the property and subsequently commenced litigation to prove its claim of lien. The project was covered by a warranty agreement under the Home Warranty program which was administered by Travelers Insurance Company of Canada (“Travelers”). Westeinde had previously provided a list of deficiencies to Travelers but not all of those deficiencies were remedied when litigation was commenced.

The parties submitted to mediation where a settlement was achieved, and the parties entered into an agreement to “release each other from all claims/causes of action, including deficiencies currently known or ought to be known” and a further, more expansive, release was executed under which the defendants agreed to release the plaintiff from all actions relating to the subject matter of the litigation and any deficiencies in the construction of the property that were known, or reasonably ought to be known by the defendants, as at the date of settlement.

After the settlement agreement was executed, Westeinde submitted a warranty claim to Travelers, which required the plaintiff to fix outstanding deficiencies. The plaintiff complained that Westeinde had agreed to release the plaintiff from liability for all deficiencies known at the date of settlement, and was thereby precluded from submitting those claims to Travelers. Westeinde argued that the agreement did not explicitly prohibit such conduct nor did it require the defendants to indemnify the plaintiff in respect of third party claims.

The Court held the terms of the release were clear and unambiguous and that the plaintiff was “stuck with what was negotiated and signed”. The Court stated the result, on its face, seemed unfair to the plaintiff but noted that the issue of fairness was not before the Court and the plaintiff could have demanded that “no third party proceedings” and indemnity clauses be included in the settlement agreement.

How can parties avoid such a seemingly absurd result? A settlement agreement in the residential construction context should, at a minimum, clarify (a) who is agreeing to the settlement, (b) what claims are being settled, (c) what is being offered in exchange for settlement and when this exchange would occur, and (d) if the agreement prohibits parties from indirectly pursuing claims through non-parties to the agreement and the consequences for doing so.

Mark Danielson is a lawyer at Pushor Mitchell. You can reach Mark at 250-869-1284, or by email at [email protected].

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