November 20, 2019 by Don McGarvey, Senior Partner, McLennan Ross LLP (Edmonton) and Joel Franz, Associate, McLennan Ross LLP
A decision from the Alberta Court of Appeal has highlighted the importance of giving the words of a contract their ordinary and grammatical meaning when there is no evidence of ambiguity as to the parties’ intent. In doing so, the Appeal Court not only overturned the trial judge, but substituted the trial judge’s decision with an order dismissing the action entirely.
In 541788 Alberta Ltd v Bourgeois & Company Ltd., an individual plaintiff sought to purchase land within the City of Edmonton. The plaintiff sought an appraisal of the land from a qualified real estate appraiser.
The contract for the appraisal services requested was negotiated by way of a single email thread as follows:
“This note is intended to provide you with a quotation of fees and timing to complete an appraisal estimating the market value of the lands [described legally and municipally]….
“I understand that the purpose of this appraisal is to assist you in estimating an appropriate purchase price on these lands….
“It is clear that the highest and best use of the subject lands is to be subdivided in a fashion that is consistent with surrounding properties…Our appraisal will investigate the issues and costs that may be incurred in the course of acquiring and developing these lands…..
“We intend on using a cost of development technique that shows the potential revenue from the sale of lots…This approach also estimates the costs to produce those lots and make them available to the public…The net present value of the revenue, less costs will show the price that can be paid for this parcel based on the assumptions that we make on your behalf. From that information you should be able to determine if the costs, effort and risk are viable from your perspective….
“If you would like us to proceed under these terms, kindly acknowledge that by return email.”
The individual plaintiff responded with the simple words: “That is what I want. Go ahead, thanks.”
Lacking any information about the individual plaintiff’s intentions for the land beyond purchasing it, the defendant appraiser made certain assumptions in analyzing the Cost of Development (Land Residual) technique of real estate appraisal. He assumed that the parcel could accommodate 58 single family lots; he priced the development of those lots accordingly and arrived at an estimated market value of the lands. The appraisal report was delivered and the parties never communicated again.
A numbered company controlled by the individual plaintiff purchased the land approximately eight months after the effective date of the appraisal. The purchase closed six months later at a price approximately $250,000 more than the appraised valued of the land.
Prior to closing, but one year after the appraisal report was provided, the plaintiffs retained an engineer and development consultant to make an application for rezoning and subdivision. The plan was to develop 53 single family lots, plus 70-75 low- to medium-density housing lots — far more than assumed by the defendant appraiser. After submitting this development proposal, the municipality advised that three remnant parcels bordering the lands would also need to be acquired, serviced, and developed in order for the municipality to approve the rezoning and subdivision application. The purchaser of the land sued the appraiser for failing to warn about the remnant parcels.
The trial judge found the email that constituted the contract between the parties “required more than a simple valuation of the lands in question for purchase, but contemplated purchase, development application, re-zoning, subdivision and sale of at least single-family units, and the identification of factors that would have a significant effect on the cost to do so…[and fell] somewhere between the narrow scope of an appraisal report…but less than a full feasibility analysis.” The trial judge held that the defendant breached the standard of care by failing to properly account for the remnant parcels.
The Alberta Court of Appeal found that the trial judge had failed to apply established contractual interpretation principles, which included considering the ordinary and grammatical meaning of the contract to determine the “subject matter” of the contract. Upon reading the contract as a whole, the appeal court held that the scope of the contract was unambiguous. It was never the intention of the parties that the defendant conduct a feasibility study for development. Only a standard appraisal was required. Simply put, the appeal court found that the trial judge had conflated a technique of appraisal, being the Cost of Development Approach — which required the appraisal to cost out a hypothetical development — with something more than a mere appraisal.
This case serves as a reminder of several key issues to be aware of in contract claims. Of particular importance is identifying a clear scope of work at the outset, preferably in a written contract. That will prevent most of these disputes from arising. While the email sent by the defendant in this case was clear, more specificity regarding the exact scope — and an express clause that disclaimed any sort of feasibility study — may have prevented the action in the first place. Precision in drafting the contract is, as always, critical.
Don McGarvey Q.C. is a senior partner with McLennan Ross LLP in Edmonton practising commercial litigation including professional liability, directors and officers liability, and fidelity claims.Joel Franz is an associate with McLennan Ross LLP in Edmonton practising in the areas of commercial litigation and insurance litigation.