Ambiguity and the Worst Case Scenario

Unfortunately, ambiguity in a contract can lead to unpredictable outcomes, like it did for an American contractor in April 2020. Whilst the legal system is different everywhere, many principles remain the same as do the consequences. I chose this example as it could happen anywhere, in this case though it is Redstone v. Sipes. Redstone engaged Sipes to create a conference room, hallway, bathroom and two offices in a commercial property.

The agreement between the parties was a simple one pager, it listed general items and a “contract” price of USD $25,000. Two months into the project, Sipes had received the full contract value from Redstone and an extra $3K as advance for bathroom plumbing. The project had a firm timeline as the client was relocating their existing office to the new one. Given the projects continuing delays, Redstone terminated Sipes and engaged a replacement contractor to complete the work.

When the new contractors commenced work, multiple defects and second-rate work were revealed and repaired. This in itself added up to $17K, so the simple contract is becoming less and less so. Redstone sent demand letters requesting damages for new contractors and repair work, but predictably Sipes refused. Then Redstone filed a suit claiming breach of contract, negligent performance, and failure to perform the work in a timely manner. It had turned ugly, like we all hope contracts never will.

At trial, the prime point of contention was the bathroom works and renovation. The contractor claimed that the plumbing labour was listed in the “contract” as work to be covered by the client, and not in his scope. That aforementioned $3K advance they claimed was to prep the bathroom for renovation, not actually complete it. In addition to this Sipes claimed wrongful termination and that the additional costs of hiring replacement contractors were notably greater than if they had completed the work.

Despite this, the court wasn’t swayed. They stated that the contract was “ambiguous in part” and ruled in favour of Redstone for the full $17K and court costs. Again predictably, Sipes appealed. The appeals court also declared the contract as ambiguous. In the appeal Sipes maintained that within the contract the bathroom was “not contemplated.” Further to this, he argued that Redstone was clearly listed as responsible for the “plumber labour.” The court then scrutinized the contract in question.

They noted that scope of work didn’t contain any description of the bathroom renovations nor any allocation of costs for the bathroom renovations and because of this the contract was unclear and ambiguous. Given that, it would come down to the intent of the parties, not a place you want to end up. In the end, the court ruled that when Redstone paid the additional $3K, it was a verbal change to the contract and Sipes was responsible for the bathroom work. Furthermore, Redstone had provided enough evidence that: (a) the work was defective, and (b) all of the costs associated with the completion of the work.

An expensive and lengthy lesson for both the client and the contractor. Long gone are the days of handshake deals and simple invoices. They simply aren’t enough to protect yourself and your payments in the construction industry today. No one starts a contract with the intention to end up in court or disputes but working under an ambiguous contract is like walking the high wire without a safety net. Why would you?!

Don’t leave your company and rights in the hands of fate, ensure your contracts are drafted and reviewed carefully and professionally. The worst-case scenario seems like overkill until you’re in it.

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