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Service contracts and contracts of enterprise

Greta has big plans to start up her own restaurant. She’s a great cook but before she can show off her skills she needs to get a little bit of help. Greta needs to hire a contractor to fix up the interior of her new space, have someone design a website to promote the restaurant, and find an accountant to help her keep track of her finances when the money starts rolling in. Heck, with all this work going on, Greta may need to talk to a travel agent about booking a vacation so she can get rested up before the grand opening. To make sure things go smoothly with all of these people, Greta needs to know a thing or two about service contracts and contracts of enterprise.

In this Infosheet, Éducaloi gives you the basics of service contracts and contracts of enterprise.

What are service contracts and contracts of enterprise?

Although they have different names, service contracts and contracts of enterprise have a lot in common. A service contract is a contract in which a person, called a service provider, agrees to perform a service for a client in exchange for payment. For example, Greta has a service contract with the accountant who keeps track of her finances and with the snow ploughing company that clears the snow in her driveway. A contract of enterprise is a contract in which a person, called a contractor, agrees to create a physical or intellectual work for a client in exchange for payment. For example, Greta has a contract of enterprise with the web designer who is building her website and with the tailor who is making her wedding dress!

Although the client informs the contractor or service provider about what he wants, the contractor or service provider is free to choose how she will carry out the contract. The client cannot, therefore, order the contractor or service provider to make the work or provide the service in a particular way. The client can, however, watch over the progress of the work or service and express his preferences about the result. For example, Greta hired John’s company to build a website for her restaurant. Greta can tell John about the type of website she wants and the date she wants it by, but she can’t order him to work all week on her website or to have particular employees work on the website. Greta can watch over the progress of the work, by asking John to let her see how the website is coming along to make sure that he is making the type of website she wants.

Does a service contract or a contract of enterprise have to be in writing?

No, a service contract or a contract of enterprise can be made verbally or in writing. But it is a good idea to have a written service contract or contract of enterprise. If ever there is a problem, it will be a lot easier to prove what the contract was about (work or service to be performed, deadline, price, if the work or service can be subcontracted, etc.) if it was written down.

What kind of information does the contractor or service provider have to provide to the client?

Before the contract has been signed, the contractor or service provider must, as much as possible, provide the client with all useful information about the work or service, including the resources and the time needed to carry out the work or service. With this information, the client can assess how much the work or service will cost and decide whether or not he wants to enter into a contract. For example, Fabien’s dream is to visit the Taj Mahal in India, so he contacts Gina, a travel agent, to book the trip. Before booking the trip, Gina must provide Fabien with all useful information about the trip, including how much it will cost, which airlines he would fly and what type of seat he would get, what the hotel is like, and any passport and visa requirements to enter India. Fabien can then make an informed decision about whether or not he wants to enter into a contract with Gina.

When a contractor or service provider is paid according to the value of the work she performs (for example, if she is being paid an hourly wage), she must inform the client about the progress of the work or the service and any expense that she has incurred, whenever the client requests this information.

For example, Mark is paying Michelle $15 an hour to paint his balcony; he is also reimbursing her for any supplies she buys. If Mark asks Michelle for an update on the work, she must tell him how much work has been accomplished, how many hours she has spent on the job, and how much she has spent on supplies like paint and brushes. With this information, Mark can keep track of how much the job is costing him and address any concerns he has with Michelle’s work before he receives a final bill.

The contractor or the service provider also has to provide the client with useful information about the work or service while she is carrying it out. The client can then become aware of any changes that need to be made to the work or the service and decide what to do about them. For example, the contractor or service provider must inform the client if extra work will be needed and, therefore, the bill will be higher. It is not enough to just send a higher bill at the end of the contract.

What kind of information does the client have to provide to the contractor or service provider?

The client must provide the contractor or service provider with any relevant information that he knows about the work or service, both before and after the contract has been entered into. The client must not provide any false information.

A client who is an expert in the subject-matter of the work or service has to provide more information to the contractor or service provider than a client who isn’t. For example, Eric hires a construction company to build him a new house. Eric knows nothing about construction so he can’t be expected to provide the construction company with much information that could be useful to building the house. On the other hand, a professional architect, who hires a construction company to build a building that he designed, is an expert in architecture, so he would have to provide the construction company with a lot more information about the construction project than Eric.

Does the contractor or service provider have to guarantee that she will achieve a particular result?

It depends on the nature of the work or service.

In certain situations, the contractor or service provider must deliver a particular result. For example, a mover must deliver the furniture to the right place; a lawyer must file a lawsuit at court before the time limit for filing the lawsuit expires; and a computer specialist must install software properly. The contractor or service provider is liable to the client if she doesn’t achieve this result unless she can prove that she failed to achieve the result because of superior force. A superior force is an unpredictable and unstoppable event that causes harm or prevents a person from fulfilling his obligations. A superior force is often a natural disaster such as torrential rain, ice storms, tornadoes, etc.

In other situations, a contractor or service provider must use all reasonable means to carry out a work or a service but she does not have to achieve a particular result. The contractor or service provider will be liable to the client if she does not use all reasonable means to achieve the result. For example, a lawyer who is acting for a client in a lawsuit has to use all reasonable means to try to win the lawsuit for his client, but he doesn’t have to guarantee that he will win the lawsuit. Similarly, a surgeon carrying out a risky surgery has to use all reasonable means to successfully perform the surgery, but he does not have to guarantee that the surgery will be successful.

Whether or not she has to achieve a particular result, the contractor or service provider must be prudent and diligent when carrying out the work or service. She must act in the best interests of the client and ensure that the work or the service is carried out according to the contract. The contractor or service provider must also follow any industry standards, rules, or guidelines.

Does the contractor or service provider have to provide materials for carrying out the work or service?

Yes, but the client and the contractor or service provider can agree that the client will provide the materials.

When the contractor or service provider provides the material, she must guarantee to the client that the materials are of good quality and suitable for the work or service. She must also guarantee that she can transfer the ownership of the materials to the client.

When the client provides the materials, the contractor or service provider must use the materials with care. She must also inform the client about how she is using the materials. Furthermore, she must immediately inform the client if the material provided by the client is unsuitable for the work or service or if it has an obvious defect or a hidden defect that the contractor or service provider should be aware of.

Can a contractor or service provider ask someone else to do the work for her?

Yes, a contractor or service provider can subcontract the work or service to another person called the subcontractor. This means that the contractor or service provider can hire someone else to do the work or service that the client hired her to do. But she cannot hire a subcontractor to perform the work or service if she was hired because of her personal characteristics or when the nature of the contract makes subcontracting impossible. For example, a contract to dig a drainage ditch can be subcontracted because it does not matter who digs the ditch as long as it gets done. On the other hand, if you hired the painter you believe to be the next Picasso to paint your portrait, this cannot be subcontracted because you entered the contract so that that particular artist could paint the portrait. A contractor or service provider can also be prevented from subcontracting the work or service if the contract says that they are not allowed to subcontract the work.

Even if she subcontracts the work or service, the contractor or service provider must supervise the work or service and she remains responsible to the client. So, if the subcontractor fails to do the work or does it badly, the contractor or service provider cannot avoid responsibility by saying that it’s the subcontractor’s fault: she must take the necessary steps to fix the problem.

My contractor or service provider gave me an estimate, but now she wants to charge me a higher price: is this allowed?

An estimate is not a final price; it is a good faith approximation of the cost of the work or service. The contractor or service provider can increase the estimate when the client asks her to do more work than what they had agreed to when the contract was made. Otherwise, if the client doesn’t ask for extra work, the contractor or service provider can only increase the estimate if she has to do extra work or incur costs that she could not have foreseen when the contract was made. In this situation, the contractor or service provider must promptly inform the client about the reasons for the increase. The client only has to pay if the increase is due to unforeseen costs or work.

For example, Hanna had given Greta an estimate of $400 for installing the light fixtures in Greta’s restaurant. When Hanna started the work, she discovered that the restaurant’s wiring was in such a terrible condition that she wouldn’t be able to install the light fixtures till the wiring was redone. Hanna can increase the estimate because at the time she made the estimate she could not have foreseen that she would have had to redo all the wiring.

Can I end my contract if I changed my mind and no longer want the work or service?

Yes. As long as the client respects the conditions explained below, the client can unilaterally end his contract with a contractor or service provider at any time, without having to give any justification and even if the contractor or service provider is doing a good job. The client must act in good faith though, meaning that he cannot end the contract just because he wants to harm the contractor or service provider. A client who abusively ends a contract may have to pay damages to the contractor or service provider.

Even if the client ends the contract in good faith, he will still generally have to pay the contractor or service provider for:

• Any work that has already been done;
  
• Any expenses that have already been incurred;
  
• Any property that was used for the work or service that can’t be returned to the contractor or service provider or used for something else;
  
• Any losses actually suffered by the contractor or service provider because of the cancellation. However, the contractor or service provider cannot get compensation for the profits he would have made had the client not ended the contract.

Sometimes, the contractor or service provider can get also compensation from the client if she proves that she had to let go of other contracts in order to sign the contract that the client ended. The contractor or service provider must keep her losses at a minimum, for example, by looking for another contract or by reusing the materials she had bought if possible.

For example, Frank hires Jill to build him a new deck. Shortly after Jill starts work, Frank decides that he doesn’t want a deck after all. Frank can cancel his contract with Jill, however, he will need to pay her for the five hours of work she has already done on the deck. Jill had also paid a non-refundable fee of $200 to a painter who would have painted the deck. Frank would have to compensate Jill for this fee and for any materials that she cannot use for a different job.

It is possible to prevent a client from unilaterally ending the contract. To do this, the service contract or contract of enterprise must clearly state that the client does not have the right to unilaterally end the contract. The contract could, for example, state that the client needs to have a serious reason for ending the contract or that the client has to give a thirty-day notice before ending the contract.

My contractor or service provider is doing a lousy job. Can I end the contract and get compensation for any losses that I have suffered?

Yes. A client can end the contract if the contractor or service provider is not doing a good job; for example, if the contractor or service provider is behind schedule or the work or service does not meet industry standards. The client can also get compensation for any losses that he suffered because of the contractor or service provider.

In order to get compensation, the client must first send a demand letter to the contractor or service provider asking her to fix the problems with the work or service. The client must also give the contractor or service provider a reasonable amount of time to fix the problem. For more information, read our Infosheet called “The demand letter  (http://www.educaloi.qc.ca/en/loi/other_infosheets/31/)”.

The contractor or service provider that I hired quit before finishing the job: is she allowed to do that?

Yes, but only if she has a serious reason. Here are some examples of when the contractor or service provider has a serious reason to end the contract:

• The client repeatedly interfered with the performance of the work or service.
  
• The client refused to cooperate with the contractor or service provider.
  
• The client wanted to change the terms of the contract.
  
• The client was repeatedly coarse and uncivil.

The contractor or service provider does not have a serious reason for ending the contract if she is ending the contract because she didn’t ask for enough money for it, unless she based her price on false information given to her by the client. Nor does she have a serious reason if she is ending the contract because she can’t perform the work or service, for example, if she agreed to do the work even though she wasn’t qualified to do it.

Even if she has a serious reason, the contractor or service provider cannot end the contract at a bad time. If she does so, she may have to compensate the client for any losses that the client suffered. For example, a travel agent who promised to book a flight by the end of the week can’t just end the contract the night before the client was supposed to take the flight.

A contractor or service provider who ends his contract must immediately make sure that the client does not suffer any loss. For example, one way to ensure this would be to continue working for the client until a replacement contractor or service provider can be found. If the contractor or service provider received an advance from the client, she must repay the client the portion of the advance for which she has not done any work.

My contractor says that I have to pay him because the new kitchen he built for me is finished. What do I do if there are still some problems with the kitchen?

Under a contract of enterprise, the contractor must create a physical or intellectual work for the client. The work is considered finished when it has been made and it is ready to be used for the purpose for which it was created. When the work is finished, the client has two options: he can accept the work unconditionally if the work is done according to the contract; otherwise, if the work has some obvious defects or poor workmanship, he can accept the work on condition that the contractor or service provider will fix the problems. For example, Eric’s contractor Robert says he is done with the new kitchen in Eric’s house. Although the kitchen seems pretty much done, Eric notices that a few tiles are loose, one of the lights doesn’t work, and the tap leaks when closed. Eric tells Robert that most of the kitchen is fine but Robert needs to fix the problems. Eric is accepting the kitchen on condition that Robert fixes the problems with the kitchen.

In general, the client does not have to pay the price of the work to the contractor before accepting the work. The client must fully pay the price of the work to the contractor if he accepts the work unconditionally. But if the client accepts the work with conditions, he doesn’t have to pay the full price of the work: he can withhold from the price an amount of money sufficient to cover the cost of fixing the problems with the work. He can hold on to this amount until the contractor fixes the problems. For example, Robert sends Eric a bill for $5000 for redoing the kitchen. Eric thinks that it would cost around $500 to fix the problems with his kitchen. So he pays Robert $4500 and holds on the $500 till Robert agrees to fix the problems.

However, the client cannot withhold payment if:

• The contractor has accepted to make the necessary repairs; or
  
• The contractor has provided enough security to cover the cost of repair; or
  
• The client is preventing the contractor from doing the work.

In some situations, a client may discover a defect with the work that was hidden at the time the client accepted the work (whether the client accepted with or without conditions). In this case, the client can ask the contractor to fix the hidden defect. The client can also ask the contractor to compensate him for any losses that he suffered as a result of the hidden defect.