Executive Summary: Key Legal and Evidentiary Issues

• The court addressed whether the homeowners breached their construction contract by refusing to pay disputed extras.
   
• Analysis centered on whether HVAC mechanical drawings prepared by GTA Designs were incorporated into the contract by reference.
   
• Justice Mandhane applied principles of contractual interpretation from Sattva Capital Corp v. Creston Moly Corp to determine the parties' objective intentions.
   
• Evidentiary issues arose over the admissibility of hearsay damages evidence based on third-party contractor quotes.
   
• Tarion Home Warranty Corporation's statutory obligation to investigate an alleged unauthorized substitution was also disputed.
   
• Questions of double recovery required deducting settlement monies received under a Pierringer agreement.
   

Facts of the case

LSI Engineering Limited, owned and operated by brothers Ramtin and Ramsin Sotodeh [source note: para. 1 spells the first brother's surname "Sotoadeh" and the second "Sotodeh"; both spellings preserved as they appear in the source], constructed a custom luxury home for homeowners Mario Hasbum and Elizabeth Morales in Lorne Park, Mississauga. The parties signed a construction contract on March 28, 2017, for a fixed price of $2,258,000 plus HST. LSI claimed the homeowners breached the contract by refusing to pay for design fees, change orders, and extras, and registered a construction lien on the home for $240,000. The homeowners countered that LSI breached the contract by departing from the approved HVAC design and installing a defective hydronic radiant floor heating system, and separately claimed that Tarion Home Warranty Corporation failed to properly investigate and remediate their warranty claim. Prior to trial, the homeowners settled their claims against the architect, David Small Designs, and the HVAC designer, GTA Designs, through a Pierringer agreement. The eight-day trial included evidence from LSI's principals and consultants, the homeowners and their experts, and Tarion's staff and engineering consultant.

Policy and legislative provisions at issue

Schedule B of the contract defined the scope of work and required written Change Orders for additional charges, while Schedule A permitted feature substitutions only with the homeowner's written approval. Schedule C set out cash allowances and identified certain "additional items," including the basement heated floor, for which no credit applied if later omitted. Schedule E, covering extras outside the contract's scope, priced electrical heated flooring at $15.00 per square foot and described "hydraulic heating" in the basement as "not applicable." Schedule T incorporated the Tarion New Home Warranty Program, requiring construction "in a workman-like manner and free from defects in materials" and protection against "unauthorized substitutions." The statutory framework under the Ontario New Home Warranties Plan Act, R.S.O. 1990, c. O.31, and its associated regulation obligated Tarion to investigate and, where necessary, arrange repairs or compensation for covered defects up to a maximum of $300,000.

Reasoning and analysis

Applying the interpretive framework from Sattva Capital Corp v. Creston Moly Corp, the court found that the mechanical drawings prepared by GTA Designs were incorporated into the contract by reference, since the contract bound LSI to proceed according to approved plans and only one set of approved mechanical drawings existed. The court rejected the homeowners' position that later, uninitialed schedules formed part of the contract, finding they post-dated signing and did not reflect the parties' shared understanding at execution. On the extras claim, the court accepted that the homeowners owed $39,000 for the basement addition and were liable for signed change orders, but rejected LSI's claims for design fees and for extras undertaken without written approval. Turning to LSI's breach, the court found that installing an "as-built" hydronic system with fewer manifolds, zones, and circuits than the approved "as-designed" system was a material breach, and calculated minimal damages using the contract's $15-per-square-foot rate for electrical heated flooring. The court excluded the homeowners' quantum evidence as inadmissible hearsay, since it consisted of third-party contractor quotes without supporting affidavits, and further discounted the litigation expert's evidence because he had not procured the quotes or verified their scope. Regarding the hydronic system's alleged defectiveness, the court preferred the homeowners' expert evidence over Tarion's, finding a "heating gap" caused by LSI's reduction in manifolds, but awarded only nominal damages given the system's secondary, "comfort only" function. Finally, the court found that Tarion had failed to investigate whether the missing manifold constituted an unauthorized substitution, even though it had adequately investigated whether the system was merely turning on.

Ruling and overall outcome

The court ruled that the homeowners breached the contract and are liable to pay LSI damages of $57,189, plus contractual interest at a rate of prime plus 5%, compounded monthly. LSI was found to have breached the contract by departing from the approved HVAC design and is liable to pay the homeowners $45,106 [source inconsistency: the operative finding at para. 6(b) states $45,106, while the underlying calculation at para. 35 yields $45,105; both figures appear in the source], plus applicable pre-judgment interest, less settlement monies received under the Pierringer agreement; the homeowners were also awarded nominal damages of $1 for the deficient hydronic system. Tarion was found to have breached its statutory obligations and was held jointly and severally liable for the damages awarded against LSI for the unauthorized substitution, with Tarion entitled to indemnification from LSI and its personal guarantors. The court left the issue of costs to be resolved by agreement between the parties, with a process set out for submissions if agreement could not be reached.