L.S.I. Engineering Limited v. Morales et al., 2026 ONSC 4472
Building a custom home involves more than quality workmanship. It also requires strict compliance with the construction contract, approved engineering drawings, and Ontario’s statutory warranty regime.
A recent Ontario Superior Court decision, L.S.I. Engineering Limited v. Morales et al., provides valuable guidance for builders, homeowners, and real estate professionals. The case illustrates the legal consequences of unauthorized substitutions, undocumented extras, and inadequate warranty investigations.
The Dispute
L.S.I. Engineering Limited contracted to build a custom luxury home in Mississauga for approximately $2.26 million.
Following completion of the home, the relationship between the parties deteriorated over several issues, including:
- unpaid extras and change orders,
- modifications to the home’s hydronic radiant floor heating system,
- alleged construction deficiencies,
- delayed possession, and
- Tarion’s handling of the homeowners’ warranty claim.
The Court was required to determine which party had breached the construction contract and whether Tarion had fulfilled its statutory obligations under the Ontario New Home Warranties Plan Act.
Extras Must Be Approved in Writing
One of the principal disputes involved the builder’s claim for additional compensation.
The construction contract clearly required that any changes to the scope of work be approved through written change orders before the work commenced.
The Court enforced that requirement.
Although the builder recovered payment for approved change orders and certain agreed extras, the Court refused payment for work performed without written authorization, even where the homeowners ultimately benefited from the improvements.
The decision reinforces a fundamental principle of construction contracts:
- If the contract requires written approval for extras, courts will generally enforce that requirement.
Builders who proceed on verbal instructions or assumptions risk performing work for which they may never be paid.
Approved Plans Must Be Followed
The most significant issue concerned the home’s basement radiant heating system.
The approved engineering drawings called for:
- three manifolds,
- six heating zones, and
- seventeen heating loops.
Instead, the builder installed a substantially different system containing only:
- two manifolds,
- two heating zones, and
- ten heating loops.
The changes were made without obtaining the homeowners’ written consent.
The Court concluded that the substituted system was less functional, less efficient, and more expensive to operate over time.
More importantly, the builder had no contractual authority to depart from the approved mechanical drawings.
The Court found this constituted a material breach of contract.
Proving Damages Still Matters
The homeowners sought damages approaching $400,000 for replacing the heating system.
However, much of their evidence consisted of contractor quotations that were ruled inadmissible because the contractors themselves did not testify.
Rather than dismiss the claim entirely, the Court used the contract itself to estimate a reasonable minimum measure of damages.
The homeowners were awarded approximately $45,000, plus interest, for the unauthorized substitution.
The decision demonstrates an important litigation principle:
- A party may prove that it suffered a loss, but without reliable evidence of the amount of that loss, recovery may be significantly reduced.
A Defective Heating System
The homeowners also argued that the heating system itself failed to provide even heat throughout the basement.
Expert evidence established that a large portion of the floor remained cooler because the builder reduced the number of manifolds and extended the heating loops beyond appropriate design limits.
Although the Court accepted that the system was defective, the homeowners again failed to prove the financial consequences of that defect.
As a result, the Court awarded only nominal damages of $1 for the defective installation.
The lesson is straightforward: proving liability alone is not enough. Damages must also be supported by admissible evidence.
No Recovery for Delay
The homeowners also claimed damages for late completion of the project.
That claim failed because the construction contract contained no fixed completion date, and the homeowners had approved numerous change orders that extended the construction schedule.
Without a contractual completion deadline, the delay claim could not succeed.
Tarion Also Found Liable
Perhaps the most significant aspect of the decision concerns Tarion’s role.
The homeowners submitted a warranty claim complaining that one of the required heating manifolds had been omitted.
Tarion investigated whether the heating system turned on, but failed to investigate whether the builder had improperly substituted the approved design.
The Court held that Tarion’s investigation was incomplete.
Because unauthorized substitutions are specifically covered under Ontario’s statutory warranty, Tarion failed to properly discharge its statutory responsibilities.
Accordingly, Tarion was held jointly and severally liable with the builder for the damages arising from the unauthorized substitution.
However, Tarion was entitled to full indemnification from the builder.
Lessons for Builders
Builders should take several important lessons from this decision:
- Follow the approved plans unless written authorization is obtained for changes.
- Document every extra through properly executed written change orders.
- Never assume that beneficial work will automatically be compensated.
- Keep complete records of approvals throughout construction.
Lessons for Homeowners
Homeowners should:
- insist that every change order is documented in writing,
- carefully review engineering drawings before construction proceeds,
- preserve evidence, if defects arise,
- obtain admissible expert evidence when pursuing damages.
Lessons for Real Estate Professionals
Although real estate professionals are generally not involved in construction disputes, this case illustrates the importance of encouraging buyers of new homes to:
- understand the builder’s contractual obligations,
- appreciate the significance of approved plans and specifications,
- recognize the limits of Tarion’s warranty process, and
- retain all construction documentation throughout the building process.
Knowledge of these issues can assist agents in properly advising clients purchasing newly constructed homes.
Comment
The Court reached a balanced result.The homeowners were required to pay for properly approved extras.
The builder was held responsible for unilaterally departing from the approved engineering plans.
Tarion was found to have failed in its statutory duty to properly investigate an unauthorized substitution claim.
Brian Madigan LL.B., Broker