Anticipated Loss of Profit After Termination Without Cause

The Dispute

A construction management company spent more than two years on a temple project in Richmond for a non-profit association. The cost estimates it produced kept landing well above what the association had said it wanted to spend, and in December 2017 the association ended the relationship. Nothing had been built beyond soil preloading and tree removal, and the company was left with an unpaid fee and the profit on a job that would never finish.

The Parties’ Positions

JM Bay Properties Inc. claimed its construction management fee of 7.5 percent of the Construction Cost, together with the profit it had anticipated earning had the temple been built, relying on the compensation the contract itself provides where an owner terminates without cause. It contended further that Tung Cheng Yuen Buddhist Association had no right to terminate as it did, reading the owner’s termination clause as confined to the insolvency and neglect situations dealt with elsewhere in the same part, and framing that reading on Contura Building Corporation v. 0772551 Ltd.

Tung Cheng resisted the claim on more than one footing, advanced at different stages of the trial. At trial, after it had closed its case, it amended its response to plead that the parties had reached no consensus ad idem, no meeting of minds, on the construction cost estimate the fee claim rested upon. The court granted leave on terms, allowing JM Bay to reopen its case and making the costs of the application payable by Tung Cheng in any event of the cause. In closing submissions it advanced a term of reasonable notice of termination in the range of six months, implied for reasons of business efficacy, which the court addressed in supplementary reasons indexed at 2022 BCSC 364. It founded that submission on Canadian Resort Development Corp. v. Swaneset Bay Resort Ltd., where the Court of Appeal implied such a term into a construction management contract containing no express provision for termination.

The Court’s Decision

The Supreme Court of British Columbia found that the parties had entered an enforceable agreement but had not agreed on the estimate of construction costs, so neither JM Bay’s fee nor its loss of profit claim as presented could rest on that estimate. It upheld the termination under GC 6.1.6, and declined to imply the notice term, since that clause and GC 6.1.8 already specified how notice was to be given and how the manager was to be compensated. JM Bay recovered its fee at 7.5 percent of the actual construction costs incurred to the termination date, and kept its claim for lost profit.

The court referred both to an inquiry before the Registrar, dismissed the remainder of its claims, and left costs to be addressed after the Registrar’s certificates issue. The profit the contract allowed survived the owner’s exit, though the manager had to establish it in evidence at the inquiry instead of reading it off an estimate the parties had not agreed.

Key Lessons for Owners and Construction Managers

• Write any cap on termination compensation into the contract itself. Where an agreement already provides an express right to terminate without cause and states what the terminating party must pay, a court may decline to imply a reasonable notice term limiting anticipated loss of profit, which is why termination clauses are read closely in construction litigation.
• Agree and record the construction cost estimate the fee formula depends on. Both parties should sign the cost estimate in writing. The best time to do that is at the time the contract is signed, although later is better than never. The court found that these parties never agreed to the estimate, which left the fee and the lost profit claim as presented without the footing the contract’s fee article gave them.

The outcome of this matter turned on the terms of the construction management contract the parties signed and the evidence before the Supreme Court of British Columbia at trial. A similar dispute may resolve differently.

ATAC LAW acts for owners, construction managers and contractors in disputes over construction contracts, including claims arising on termination.

Mike C. Stewart acted for JM Bay Properties Inc. at trial. Roy Donghee Kim was also involved in this matter.