The Consumer Protection Act, 2002 and Construction Contracts

This article explores some of the different ways Ontario's consumer protection legislation applies to construction contracts. It identifies key provisions of the Consumer Protection Act, 2002 ("CPA") and notable decisions of the Ontario courts.

Application of the CPA to Construction Contracts

As the name of the legislation suggests, the CPA is not intended to apply to business-to-business relationships but rather to transitions between businesses and individuals acting for personal, family or household purposes.[1] These relationships are common in many home renovation, repair or new build construction contracts.

While it has been generally accepted that the CPA can apply to consumer contracts for repairs and home renovations,[2] there is some ambiguity in the case law as to whether or not the real property exception listed in section 2(2) of the CPA prevents the act from applying to construction contracts for new home builds.[3]

Ontario (Ministry of Consumer Services) v K-Tech Building Systems Inc[4] is a lengthy decision regarding a contract for the construction of a cottage in South Algonquin. In K-Tech, the property owners contracted with the defendant, K-Tech Building Systems, to supply and install pre-fabricated exterior walls, windows, doors, roof shingles, lumber, roof trusses and other building materials on a concrete foundation that the owners had to arrange for separately, with a different contractor. When the contractor was unable to fulfill its contractual requirements, the property owners initiated a complaint to the Ontario Ministry of Consumer Services pursuant to the CPA. The defendant claimed, in part, that the CPA did not apply to the agreement in question since the "transaction concerns building a year-round home which are not ’goods‘,  but a transaction involving ’real property’".

The Ontario Court of Justice rejected the defendant’s argument, stating that the components and materials were still a type of "good" that would only be legally transformed into "real property" after the proposed cottage had been completed and became attached to the land, and that K-Tech had not sold real property.

The decision in K-Tech was distinguished in BCR Construction Inc v Humphrey ("Humphrey").[5] In Humphrey, the Divisional Court accepted the decision of the trial judge in holding that the CPA did not apply to a contract to construct a custom built home on a property that the owners had purchased from the contractor 23 days earlier. In that case, the trial judge found that the construction contract was "not independent of the [Agreement of Purchase and Sale for the land], and although the two contracts were formalized on separate dates, that the "real substance" of the parties' "transaction" was one ongoing agreement for the purchase and sale of the lot and construction of the custom built home." The trial judge, as a result, concluded that the CPA was not applicable. On appeal, the Divisional Court held that given the evidence provided, the trial judge's conclusion as to the real substance of the transaction was within a range of reasonable outcomes.

The two decisions, Humphrey and K-Tech, are somewhat at odds with each other in the broad sense that both cases were for the construction of new properties and the courts arrived at different conclusions as to whether the CPA would apply. However, one can rationalize the two decisions by emphasising the fact that the Court in Humphrey found that the "real substance" of the owners' transaction was for the purchase of the real estate, and not the building contract.

Requirements of Consumer Contracts

Construction contracts governed by the CPA are required to comply with specific requirements. In particular, the CPA prescribes certain requirements for all "future performance agreements". Future performance agreements are defined in section 1 of the CPA as "a consumer agreement in respect of which delivery, performance or payment in full is not made when the parties enter the agreement."

Section 22 of the CPA requires that every future performance agreement be in writing and "be made in accordance with the prescribed requirements". Among other requirements prescribed in the regulations, consumers must be provided with:

5. An itemized list of the prices at which the goods and services are to be supplied to the consumer, including taxes and shipping charges.

6. A description of each additional charge that applies or may apply, such as customs duties or brokerage fees, and the amount of the charge if the supplier can reasonably determine it.

7. The total amount that the supplier knows is payable by the consumer under the agreement, including amounts that are required to be disclosed under paragraph 6, or, if the goods and services are to be supplied during an indefinite period, the amount and frequency of periodic payments.

[…]

9. As applicable, the date or dates on which delivery, commencement of performance, ongoing performance and completion of performance are to occur. [6]

In addition, section 5 of the CPA requires that where any information is required to be disclosed, the disclosure must be "clear, comprehensible and prominent".

For a business owner, there may be seemingly harsh consequences for failing to meet the requirements of CPA. For example, section 23 of the CPA allows a consumer to cancel a future performance contract up to one year after entering into it. Further, section 95 of the CPA states that "the cancellation of a consumer agreement in accordance with this Act operates to cancel, as if they never existed, (a) the consumer agreement; (b) all related agreements; (c) all guarantees given in respect of money payable under the consumer agreement; (d) all security given by the consumer or a guarantor in respect of money payable under the consumer agreement; and (e) all credit agreements… and other payment instruments… (i) extended, arranged or facilitated by the person with whom the consumer reached the consumer agreement, or (ii) otherwise related to the consumer agreement". In addition, section 96(1) of the CPA states that "[i]f a consumer cancels a consumer agreement, the supplier shall, in accordance with the prescribed requirements (a) refund to the consumer any payment made under the agreement or any related agreement…".

Equitable Powers of the Court

The purpose of the CPA is to protect consumers from unscrupulous vendors of services and materials. However, it is not difficult to imagine a scenario where the broad and powerful remedies available under the CPA can be used against a innocent contractors or suppliers.

The good news for such contractors or suppliers is that Courts have recognized that construction contracts differ from your typical door-to-door sales transactions, and just as consumers may require protection, contractors may be in need of protection from homeowners who try to use courts to take advantage of them.[7] To this end, section 93(2) of the CPA grants a court the ability to order that a consumer be bound by all or a portion or portions of a consumer agreement, despite the consumer agreement not being in strict compliance with the Act. Courts have relied on this provision where they have found it would be unequitable to render the consumer contract unenforceable.

In Grainger v Flaska, the defendant homeowner admitted, at trial, that she deliberately deferred payments to the plaintiff contractor, with the intention of inducing the contractor to complete the work on her project without ever paying him. In support of her position, the homeowner "decided that she did not have to pay [the contractor] because he had not provided her with a written contract." The owner relied on the CPA as authority that she is entitled to the benefit of the contractor's work for free. [8]

The Court found that "[s]he deceived [the contractor] by promising payment even though she had no intention of paying him and every intention of filing a complaint with the Ministry of Consumer and Business Services seeking a refund of all the money she paid him." In addition to this egregious behaviour, once the contractor completed its work, the homeowner "threatened prosecution under the CPA and pointed out that conviction carries fines of up to $250,000."

The Court in Grainger v. Flaska condemned the homeowner's behavior stating, “hard working contractors are in need of protection from homeowners who try to use the courts to take advantage of workers.” Despite finding that the CPA applied to the contract, and that the consumer contract was not compliant since it was not made in writing, the Court relied on section 93(2) of the CPA, finding that it would "be inequitable if the court were to relieve [the homeowner] of her contractual obligation to pay [the contractor] because the contract is not in writing." The Court further stated that the homeowners conduct was "reprehensible".

What to know as an Owner and Contractor

Homeowners and contractors should both be aware of consumer protection legislation and whether the CPA applies to their specific contract. Having a lawyer review the contract to ensure that it adheres to any applicable legislative requirements could prevent unanticipated issues down the road. Contractors should take time to ensure that any standard form contract they prepare meets the requirements of the CPA.

Homeowners should also be aware that it is more cost effective to negotiate a fair contract that accurately addresses their specific needs than to try and rely on consumer protection legislation once the contract has already been executed. Entering into a contract drafted entirely by another party, without first obtaining legal advice, can result in unintended consequences once the project is underway.