Test your knowledge with this fictional scenario*:
Mantario Housing Corporation (“MHC”) manages 12000 social housing units for a mix of low-income earners, disability pensioners and individuals on social assistance living in the Greater Mantario region.
In early 2013 MHC hired Apex Carpets Ltd. on a two year contract to supply and install carpeting and underlay for 600 housing units in need of carpet replacement. The contract between MHC and Apex set a price of $11.30 per installed square yard, and included detailed procedures and technical specifications for product, installation and other requirements. The contract provisions required MHC to determine and verify substantial performance, with the right to return any invoice with which it was not satisfied within five days, for reconsideration by Apex. MHC work orders specifying the square footage of carpet required for each unit were to also include a floor plan for each unit. For its part, Apex committed to meeting certain industry quality standards, including assuming the burden of ‘waste’ (parts of a 12 foot wide roll that are cut and discarded in the installation process).
Due to internal corporate reorganization coupled with a wave of retirements, MHC was unable to devote sufficient resources to this contract with Apex. As it turned out, MHC did not even have floor plans, let alone drawings with detailed dimensions, to accompany the work orders sent to Apex. Invoices were simply processed and paid as presented. Apex Carpets Ltd. never demanded proper documentation before commencing work to install the carpeting pursuant to the work orders. Although someone from MHC usually dropped by to visually confirm that carpet had been laid prior to approving an invoice, little more scrutiny was brought to bear on the contract with Apex.
In mid-2014 Dave Simmons was hired as Director of Project Implementations at MHC, after carpet invoicing for 400 units had been received and most of those had been paid in full. Dave immediately became suspicious about the invoices submitted by Apex, as the invoiced square footage already far exceeded the total square footage for all 600 units. Dave suspected that MHC had been billed for ‘waste’, clearly a cost to be borne by Apex under the contract.
On July 1, 2014 Dave sent an email to the Apex contact named in the contract, outlining the concerns MHC had with the invoicing and demanding an explanation from the contractor. After two weeks of waiting for a response, Dave became frustrated with what he perceived as their uncaring attitude, and issued a formal Termination Notice to the Apex at their mailing address, withholding payment of outstanding invoices totaling $86,165. As Dave later learned, the contact email was incorrect and in fact there had been no communication with Apex at all – through email or otherwise – during the first year and a half of the contract.
Apex commenced litigation against MHC for damages for breach of contract and for payment of outstanding invoices, pointing to the lack of inspection as well as lack of accurate floor plan and other information provided to it by MHC. In its Statement of Claim, Apex also pointed out that MHC had failed to follow the staged rectification and termination process that had been included in the contract:
Step 1: Issue a Notice to Rectify
Step 2: Issue a Stop Work Order
Step 3: Issue a Termination Notice.
This litigation has received front page coverage in The Mantario Gleaner and MHC executives are demanding answers from Dave. His problem is complicated by the fact that he has been unable to find another carpet company to complete the remaining carpet installations, and tenants are threatening to go to the Ombudsman with their concerns.
Who do you think will win this lawsuit? Can you list five things that MHC could have done to avoid these problems and stay out of litigation altogether?
Look for our January 5th newsletter which will include a summary of suggested strategies for preventing this type of contract disaster at your organization.
In the meantime, if you think the contract management skills of you or your staff could use some updating, join us online starting January 18th for PSPP 203 – Managing and Evaluating Contract Performance!
*This scenario is loosely based on the facts from two court cases: Ottawa Community Housing Corporation v Foustanellas (Argos Carpets), 2013 ONSC 973, and Soo Logging Co Ltd. v Province of BB.C. (Ministry of Forests) , 1646 C966303 BCSC