Interpretation Saves Contract From Penalty Doctrine

Contract law contains a fundamental rule: penalty clauses are prohibited and liquidated damage clauses are permitted. But in its recent decision in Ottawa Community Housing Corp. V. Foustanellas, the Ontario Court of Appeal held that there is another way to look at this rule. The clause is valid if, properly interpreted, the clause delays, but does not permanently affect, the exercise of the contractor’s rights. In this case, the clause is not a penalty or liquidated damages clause at all. Parties about to enter into a building contract should examine this decision to see if there are ways to draft the contract to avoid the penalty doctrine but achieve much of the desired result.

Background

Ottawa Community Housing Corp. (OCHC) entered into a contract with Argos Carpets, of which Foustanellas was the principal. OCHC later determined that Argos was overbilling OCHC. OCHC then notified Argos that it was withdrawing the remaining work under the contract and withholding payment of the past amount due under the contract. At trial, Arogos argued that the contractual provision in question amounted to a liquidated damages clause and limited, to the withheld payment, the amount which OCHC could recover against it.

Clause 1.6.1 of the contract entitled OCH, in certain circumstances, to “take the whole operation, or any part of the operation out of the hands of the Contractor.” The owner relied upon that clause to take the remaining work out of Argos’ hands.

Clause 1.6.3 stated that:

     “…where any or all of the work has been taken out of the hands of the Contractor, the Contractor will not be entitled to any further payment, including payments then due and payable but not yet paid. The obligation of the Owner to make payments will cease, and the Contractor will be liable upon demand to pay the Owner an amount equal to all of the losses and damages incurred by the Owner for the non-completion of the work.”

Decision of the Ontario Court of Appeal

The Court of Appeal held that clause 1.6.1 entitled the Owner to terminate the contract on the happening of events which triggered that clause. If that occurred, the courts said, then the owner was entitled to invoke clause 1.6.3.

The Court of Appeal agreed with the trial judge that clause 1.6.3 was neither a penalty clause nor a liquidated damages clause as recognized in established contract case law. Rather, clause 1.6.3 had two effects:

“ First, it relieves the owner (OCHC) from any obligation to make payments to the contractor, including in respect of unpaid receivables, pending determination of the owner’s losses and damages arising from the contractor’s non-compliance with the carpet contract. Second, it establishes the contractor’s (Argos’) liability to the owner (OCHC) for an amount equal to the owner’s losses and damages occasioned by the contractor’s non-completion of the work provided for under the carpet contract.

Thus, properly interpreted, clause 1.6.3 functions as a “stop payment” provision. It is designed to halt the owner’s contractual obligation to make any payments to the contractor pending the determination of the owner’s losses and damages arising from the contractor’s breach of contract.”

The Court of Appeal found that several ingredients of the contract supported its interpretation of clause 1.6.3.

First, the clause did not state a specific amount which was recoverable by the owner, such as one would expect to find in a penalty or liquidated damages clause.

Second, the amount due to the contractor could vary widely from job to job, making the clause a sensible delay of the rights of the contractor on all jobs until the owner’s damages could be assessed.

Third, the fact that the clause gives the owner the right to set off its claims against the contractor’s entitlement to payment for work “does not convert clause 1.6.3 into a penalty or liquidated damages provision.”

Discussion

Clause 1.6.3 might have been held to be an unenforceable penalty clause if its effect was to forfeit the monies due to the contractor when the balance of the contract work was taken out of its hands. Or, if the amount of the forfeiture was a reasonable estimation of the owner’s damages – an apparently unlikely scenario – the clause might have been held to be effective as a liquidated damages clause which set the amount of the owner’s maximum entitlement as the amount owed to the contractor when the work was taken out of its hands, as the contractor argued. Instead of determining the dispute according to the traditional penalty/liquidated damages debate, the trial and appeal court took the debate to an entirely different debate – one about the proper interpretation of the contract.   And they found that all the clause did was defer the contractor’s right to enforce its claim to monies due until the owner’s claim for damages was determined.

This decision is a good example of the rule of contract interpretation known by its Latin name: ut res magis valeat quam pereat: or, that the thing shall have effect rather than perish. In other words, if there is an interpretation that saves the validity of the contractual provision, it should be preferred over one that would cause it to perish. In this case, interpreting the clause to delay the rights of the contractor gave force and effect to the clause which might otherwise have been an ineffective penalty clause.

A party negotiating a building contract should consider this decision when deciding what remedies it really wants in the event of a breach of the contract by the other party. If the party really wants a definitive fixing of the amount due by the wrongful party, then this decision will not help it. In that situation it will have to face up to the penalty/liquidated damages rule and all the perils that the rule involves. If the amount fixed is later considered by the court to be an unrealistic estimation of the damages flowing from the breach, then the clause may be struck down as a penalty clause.

But if the party really wants a means to forestall the other party from collecting monies due under the contract until its own damages are determined, then this decision offers a way to accomplish that result.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 2, part 3(d), Chapter 4, part 3(h) and Chapter 9, part 6(j).

Ottawa Community Housing Corp. V. Foustanellas (2015), 125 O.R. (3d) 539

Building contracts – interpretation – penalty clauses – liquidated damages clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     October 14, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Damage To The Rebar And The Deflection Of Floor Slabs Are Covered Under Builders’ Risk Policy: B.C. Court Of Appeal

The extent of coverage under Builders’ Risk policies is a matter of continuing debate in Canada. Insurers try to draft policies which do not cover the poor workmanship of contractors, and contractors continue to insist that they have bought and paid for insurance which covers damage to the work in progress. And so the debate continues to rage with neither party apparently able to draft a policy which is clear to both parties.

The latest chapter in the ongoing saga is the decision of the British Columbia Court of Appeal in

Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co.. In this case, the over-deflection of the concrete floor slabs caused damage to reinforcing bar in the floor, cracking of the floor and a sloped floor that had to be sanded down, all involving an expense of $14 million. The insurer argued that this was a clear case of poor workmanship not covered by the policy. The trial judge held that these costs were covered by the policy and his decision was upheld by the Court of Appeal.

Those concerned with insurance coverage in the construction industry are well advised to consider whether this result was due to the peculiar facts, or to the wording of the policy.

Background  

Acciona entered into a contract to design and build a reinforced concrete structure as an addition to the existing hospital and hired Campbell Construction as the principal subcontractor to design and build the concrete framework and slabs.

The slabs were designed with an upward camber or crown of 30 mm in the centre of the slab. The camber was part of the design of the slabs so that, with the curing of the slabs and during their normal life, the slabs would be level. The camber was to be achieved by the particular formwork to be used for making the floors, the wedges inserted into those forms, and plywood sheathing into which the concrete was placed. Re-enforcing bars (“rebars”) were placed in the forms and then concrete poured into the forms.

When the pouring of the concrete was completed, some of the slabs over-deflected, resulting in the rebars being over-stretched and cracking of the slabs. While the testing of the slabs showed that they met applicable design criteria and standards, the uneven floors were unacceptable from a hospital-use standard. The only solution was to grind down the slabs to make them flat. That resulted in isolation of the building, extensive work, and cleaning.

Under its Builders’ Risk policy with Allianz, Acciona claimed $14.9 million including subcontractor costs of $4,050,949, indirect costs of $1.6 million, management fees of $550,000 and a profit margin of $1.6 million.

As the Court of Appeal noted, the crucial finding of the trial judge was that “the over-deflection and cracking of the slabs and bending of the rebar was not caused by defective design, but by defective formwork and re-shoring procedures during construction …. The over-deflection, bending and cracking were caused by the failure of the formwork and re-shoring procedures to account for the thin design” of the slabs.

Decision of the Court of Appeal

  1. Initial Coverage

Clause 3 of the policy insured against ALL RISKS of direct physical loss of or damage to the property insured. The trial judge found that the cracks in the slab and the damage to the rebar due to over-deflections were not merely defects in the slabs themselves, but rather constituted damage. The trial judge found that:

“the slabs were not defective as designed and built but were damaged as a result of inadequate support while they cured. In particular, because of the inadequate shoring procedures, the slabs over-deflected and cracked, and the rebar inside the slabs was damaged irreparably.”

Relying on that finding, the Court of Appeal said:

“The Insurers’ argument – that the over-deflection, bending and cracking was a manifestation of faulty workmanship and therefore not damage to property – is inconsistent with the trial judge’s finding of fact that the defect was a state of affairs (faulty or defective shoring) and the damage was the result of an occurrence (over-deflection).”

The insurers also argued that the slabs could only be “damaged” if they were once in a satisfactory state but no longer, and the slabs were never in an initially satisfactory state. The Court of Appeal rejected that argument, saying:

“To accept that argument would be to deprive the Contractor of any insurance coverage for unfinished work during construction, which cannot be what the parties intended. The Policy, a course of construction policy, was clearly intended to afford coverage for damage to property that was in a partially finished state. In any event, the rebar that was damaged was installed correctly and undamaged before the faulty shoring caused it to become deformed.”

  1. Exclusion

The policy excluded:

“all costs rendered necessary by defects of material workmanship, design, plan, or specification and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.”

The policy also went on to said that “any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan or specification.”

The insurers argued that this exclusion was very different than the usual exclusion in a Builders’ Risk policy which excludes damage to the insured’s own work but not “resulting damage.” The insurers said that the whole of the work was excluded from coverage because the over-deflection, bending and cracking was a manifestation of a defective design. The contractor argued that the exclusion required a sequential analysis:

first, there must be a finding of damage under the policy;

second, the total cost to repair and rectify the damage must be determined; and then

third, from that recoverable cost, the policy excludes only those costs of repair that would have remedied the defect immediately prior to the occurrence of the damage.

The trial judge agreed with the contractor’s interpretation of the policy. He held that “the excluded costs are those that would have remedied or rectified the defect before the cracking and over deflections occurred i.e. the costs of implementing proper formwork and shoring/reshoring procedures or incorporating additional camber into the formwork.” Since there was no evidence of the cost, he concluded that those costs would have been minimal, and no more than the defective procedures that were in fact implemented.

In the Court of Appeal, the insurers made two attacks on the trial judge’s decision.

First, they said that the trial judge had effectively relied upon the “insured’s own work v. resulting damage” approach contained in other policies, and that the exclusion in this policy was not such an exclusion.

Second, the insurers argued that the trial judge’s interpretation made no commercial sense because it would only exclude minimal amounts of preventative measures, which could not be what the parties intended as it would never address the real and substantial effects of poor workmanship.

The Court of Appeal rejected both arguments of the insurer.

First, the court pointed out that the trial judge had made the “crucial” finding that the defects in the framing and shoring had resulted in the slabs being damaged. On the basis of that fact, the slabs were not a “portion of the insured property containing any of the said defects” within the exclusion.

Second, the trial judge had interpreted and applied the wording in the exclusion, and had not just applied the “resulting damage” analysis.

Third, the fact that the resulting damage falling within the exception in this case was minimal was “coincidental “and in other circumstances the exclusion could result in significant costs being outside the policy.”

  1. Subcontractor costs.

Of the $14.9 million claim, increased subcontractor costs amounted to $4,050,949. The trial judge and the Court of Appeal held that these costs were not direct costs that fell within the coverage of the policy. Neither court explained exactly what the “increased subcontractor costs” were. The overall repairs were described by the Court of Appeal as follows:

“the slabs were ground to make them flat. This grinding created silica dust and certain areas had to be shot blasted. As a result, each wing had to be isolated and sealed using polyurethane and negative air pumps. Once the repair work was completed, extensive cleaning was required in order to meet hospital standards.”

The Court of appeal said that trial judge had disallowed these costs for the following reason:

“He agreed with the Insurers that such costs are of a different nature than the direct costs incurred as a result of physical loss of or damage to the property insured. Increased subcontractor costs arose out of the Contractor’s contractual obligations to the subcontractors and, therefore, fell outside the scope of coverage.”

On this basis, the costs were held not to be direct costs, even though they apparently arose from the rectification of the damaged slabs.

Discussion    

The trial court and Court of Appeal did not find that the finished concrete floors were defective floors due to bad workmanship. Rather, they found that the rebar and concrete slabs were damaged by separate elements – defective formwork and wedging. The exclusion clearly demonstrated that coverage was intended to be provided when one part of the work damaged another part.

The real question in these cases is: when are parts of the work different, and when are they the same and part of the same thing? There does not seem to be any clear way to differentiate between the two parts of the work. As Heintzman and Goldsmith on Canadian Building Contracts says:

“The idea behind this exception is that only the property to which the exception applies is the property that itself was faulty or improper or the subject of faulty workmanship or design or inherent vices of latent defects, and not any other insured property.”

The cases cited in that book show how difficult it is to draw the line. In some cases, the entire building or structure has been held to fall within the exception, and not just the inadequate brace or defective part which led to the damage. In a recent Alberta case, when window cleaners scratched the windows during the final clean-up of the building, the damage to the windows was excluded by the faulty workmanship exclusion: Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 CarswellAlta 511, [2015] 8 W.W.R. 466.

In the present case, however, the court was able to conceptually separate the two elements. In the absence of a definitive line, the ambiguity will likely be interpreted in favour of the insured.

The courts’ interpretation of the exclusion is particularly interesting because, by its differently worded exclusion, the insurer was trying to avoid the “resulting damage” line of cases. On the court’s interpretation, however, the wording that the insurer came up with only excluded the costs arising from another way of doing the same work properly, a result with which the insurer was not happy. One wonders whether the line between the faulty work and the non-faulty work is too difficult to draw and the insurers would be better off to eliminate the exclusion and re-price the insurance.

The courts’ exclusion of the subcontractor’s costs is perplexing. There was no real explanation what these costs were and why they were not covered. If the least expensive way to repair the slab was by the subcontractor doing the repair work, then it is hard to understand why these costs were not the direct costs of the damage. If, in order to qualify the costs as the direct costs of the damage and avoid the exemption, it is necessary to bring in another contractor – even if it is more expensive to do so – that does not seem to be a sensible approach. If the present decision requires that approach to be adopted, then in the future the contractor may have to obtain the insurer’s agreement that the remedial work can be done by the subcontractor, or if not, retain another firm to do the work, even at a greater cost.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 14, part 3(b)(ii)

Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 CarswellBC 2210, 2015 BCCA 347

Thomas G. Heintzman O.C., Q.C., FCIArb                                     October 10, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Trust Fund Obligations Continue After A Lien Bond Is Filed: Supreme Court Of Canada

The Supreme Court of Canada recently released its highly anticipated decision in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel. The court has held that the trust fund obligations on a construction project did not terminate when the contractor filed a bond in respect of the subcontractor’s lien.

This decision is of fundamental importance to building contracts and construction projects. It means that, even after posting a bond for a subcontractor’s or supplier’s goods and services, an owner and contractor must continue to hold and pay funds due in respect of the construction project to those who are entitled to those funds down the payment chain. They cannot rely upon the bond as discharging that obligation.

Those sympathetic with the contractor’s position may assert that piling the trust fund obligation onto the owner or contractor once a lien bond has been filed is burdensome and unfair. However, the Supreme Court held that enforcing trust fund obligations in addition to the lien rights fortifies and strengthens the whole statutory regime.

Background

Stuart Olson Dominion Construction Ltd. (then known as Dominion Construction, and referred to herein and in the judgment as Dominion) was the general contractor for the construction of a new football stadium for the University of Manitoba. Structal was its structural steel subcontractor. Structal filed a builder’s lien against the property. Dominion filed a lien bond for the amount of Structal’s lien claim. Structal approved the bond and vacated its lien. Dominion continued to receive progress payments from the Owner. Structal asserted that Dominion was still required to comply with the trust provisions of the Act even though a bond had been provided for its lien. Dominion refused to make further payments to Structal and maintained that it had a set-off against the monies claimed by Structal, that there was no breach of trust, and that Structal was fully secured by the lien bond.

Structal notified the owner that it should withhold a $3.5 million payment from Dominion or it would bring a claim against if for violation of the trust provision of the Act. The owner then required Dominion to bring an application in the Manitoba Court of Queen’s Bench seeking a declaration that it had satisfied its trust obligations to Structal. If that order had been granted, then the owner could have used those withheld monies to pay other trust claimants and then other creditors. Structal then filed its own motion requiring full payment of its past-due invoices, without deduction or set-off, upon Dominion receiving the funds from the Owner.

The motion judge held that the filing of the lien bond extinguished the trust obligations of Dominion under the Manitoba Builders’ Liens Act (the Act or BLA). The Court of Appeal reversed this decision, holding that the subcontractor’s right to enforce a statutory trust was entirely separate from its right to file a lien claim, and that the subcontractor was entitled to enforce both rights even though a lien bond had been provided to secure the lien claim.

Decision of the Supreme Court of Canada

The Supreme Court recognized that there were two preoccupations of the construction industry at stake in this case:

First, ensuring payment of contractors and subcontractors; and

Second, encouraging liquidity in the flow of funds during the job.

The question in the present case was whether protecting the first preoccupation, by enforcing the trust claim, would interfere with or jeopardize the second, the flow of funds during the project. The Supreme Court found no such interference or jeopardy. Indeed it found that enforcing the trust fund provisions in this situation would enhance, while not enforcing whose provisions would undermine, the purpose of the statute:

“The purpose of the statutory trust was articulated by the Manitoba Court of Appeal in Provincial Drywall: “The trust provisions are designed to help assure that money payable by owners, contractors and subcontractors flows in a manner which is in accord with the contractual rights of those engaged in a building project and it is not diverted out of the proper pipeline”……Finding that a trust claim is extinguished by filing a lien bond would undermine this purpose. A lien bond merely secures a contractor’s or subcontractor’s lien claim rather than satisfying it through payment and it does not extinguish the owner’s or contractor’s obligations under the statutory trust. The filing of a lien bond has no effect on the existence and application of the trust remedy.” (paras. 40-41)

The court noted that this conclusion is consistent with the word “all” which is used twice in section 4(3) of the Act. That subsection requires that the contractor not divert trust funds for its own use until all subcontractors have been paid all amounts owing to them.

The court noted that in Manitoba, the trust provisions were formerly contained in The Builders and Workers Act, while the lien provisions were found in The Mechanics’ Liens Act. In the statutes of Manitoba 1980-81, the two statues were repealed and incorporated into the Act. But, as the court said, “the legislature did not expressly delineate how the lien and trust provisions were to interact in situations such as this case, where both remedies are pursued at the same time by a contractor or subcontractor.” Accordingly, while Dominion submitted that the trust fund provision was a secondary mechanism designed to protect lien rights and provided no wider protection, the court found no basis for that submissions: “The trust remedy originated in a statute that did not provide a lien mechanism and it was not altered to limit its applicability when both were incorporated into the BLA. Rather, both remedies exist independently.” (para. 35)

The court also noted that the two provisions contain different rights and affect different persons:

“The lien provisions do not impose obligations on contractors or subcontractors with respect to funds received. Trust funds, on the other hand, cannot be appropriated for other purposes until all subcontractors, all persons who have supplied materials or services have been paid (s. 4(3)(a)). Moreover, pursuant to s. 16 no lien can encumber the interest of the Crown, a Crown agency, or a municipality. There is no similar exclusion with respect to the trust provisions of the Act (see s. 3(1)).” (para. 32)

The court accordingly concluded:

“Nothing in the BLA suggests that the lien and trust provisions do not remain as two separate remedies. This is not to deny that a contractor or subcontractor may have both a lien and trust claim and that the funds sought under each remedy may be the same. But this does not change the fact that the claimant has access to both of these remedies.” (para. 38)

The court then addressed Dominion’s submission that the filing of the lien bond terminated the subcontractor’s trust fund rights. It rejected that submission for two reasons.

First, it held that if Dominion’s submission were correct, then if the subcontractor’s lien action failed (because, for instance, it had filed the lien claim late), then the subcontractor would also lose its trust fund rights. That result was clearly not envisaged by the legislation which contemplates that the two remedies may be independently asserted.

Second, the court rejected Dominion’s submission that maintaining the separate enforceability of the trust fund and lien claims would result in double payment of the subcontractor when the owner provides a lien bond and also has trust funds or is receiving trust funds from the owner. It did so by making two points.

First, a lien bond is not payment to the subcontractor, but only a promise of payment by the bonding company if the subcontractor succeeds in its lien action.

Second, the decision to obtain a lien bond, rather than pay the trust monies into court, is one for the contractor or owner to make. While that choice may result in double security, it does not result in double payment:

“There may be circumstances where a contractor will choose to maintain double security where there are lien and trust claims for the same work, services, or materials, by acquiring a lien bond while still holding trust funds. However, a contractor can avoid double security by paying cash into court pursuant to s. 55(2) instead of depositing a lien bond……..So long as the trust funds themselves are deposited with the court, the funds are secure and the trust has not been breached….A lien bond involves only an assurance that the surety will pay the amount of any lien judgment should the lien defendant fail to do so. The bond does not constitute security for the trust claim and does not result in the protection of the actual trust monies at issue. An owner, contractor, or subcontractor who chooses to file a lien bond with the court instead of depositing the funds at issue must maintain the trust fund in addition to the bond.” (paras. 46-47)

The court concluded with the observation that:

“Dominion chose to provide security by way of a lien bond rather than payment of funds into court. It is true that it paid premiums for that bond which are not recoverable, but that is simply the cost of the security which it chose to provide. Structal will not receive double payment.” (para. 49)

Discussion

There are many interesting points to discuss about this decision, but here are a few:

  1. It is important to remember that, assuming that the owner pays the monies on the project in accordance with its statutory obligations, the owner will only be liable for the holdback. In Manitoba, the owner’s holdback is 7.5 percent of the monies due under the main contract, and in Ontario and most other provinces the holdback is 10 percent. So normally, by its lien the subcontractor is seeking to protect its right to that holdback in the owner’s hands. However, the trust provisions apply to any monies due on the project up and down the pipeline of payment. So if the contractor’s position had been upheld, that would have dramatically limited the trust fund rights of subcontractors, sub-subcontractors and suppliers.
  1. In some provinces, such as Alberta and Ontario, the subcontractors all share in the monies paid into court or protected by security such as a lien bond, even if those monies or that security are initially paid or provided to take one particular lien off the title to the property. In Saskatchewan, it is only the lien claimant whose lien is discharged by payment into court or by provision of security who is entitled to the money in court or other security, and in Manitoba, New Brunswick and Prince Edward island the lienholder whose lien is discharged by the payment into court or provision of other security has a first charge on those monies or security. So, the argument that a lien bond is not payment, and far from it, is even stronger in the former provinces than the latter.
  1. The Supreme Court noted that, In Manitoba the lien provision and the trust fund were in different statutes as recently as 1981. In other provinces, such as Ontario, the lien and the trust fund provisions have been in the same lien statute for a long time. The Supreme Court noted that the legislative history in Manitoba supported its conclusion that the lien rights and trust fund rights are entirely separate, and that accordingly the trust fund rights are not eliminated by the provision of a lien bond. However, it seems unlikely that this distinction will make any difference in interpreting these lien statutes. The reasoning of the Supreme Court about the distinction between lien rights and trust fund rights appears to apply to all those provincial statutes.
  1. Trust fund rights start at different levels in different provincial statutes. In some provinces, they start at the owner’s level. Thus, in Manitoba, monies received by the owner that are to be used in the financing of the improvement, or are in the hands of the owner and payable to a contractor on the basis of a certificate of a payment certifier, are trust funds. In Ontario, the trust fund remedy was first introduced at the contractor level in 1942, and expanded to the owner level in 1969. The regime in Nova Scotia and Saskatchewan is similar to the present regime In Manitoba and Ontario. In other provinces, such as Alberta, the trust fund starts at the contractor level, and it is monies received by the contractor after a certificate of substantial completion has been issued that are trust funds for the benefit of persons who have performed work or provided services on the project. This difference may have been very material in the present case. If the trust fund obligation only commenced if and when the monies were paid to the contractor Dominion, then Structal may have had no right to give notice to the owner and demand that the trust fund rights be adhered to at that level. If that is so, then there may be “leakage” in the payment pipeline at the owner’s level in some provinces that this decision will not address. One wonders whether, in those provinces where the trust fund remedy starts at the contractor level, the legislation should be amended to move that remedy to the owner level for the sake of consistency across Canada and to ensure that the payment pipeline applies to all levels of the project.
  1. An underlying but unstated issue in this case was whether the imposition of the subcontractor’s trust fund rights, in addition to its lien rights against the land or the lien bond, would be unfair, or commercially unreasonable by interfering with the flow of funds during the construction project. In the absence of proof of those sort of circumstances, the wording of the statute showed that the subcontractor was entitled to assert both rights. The owner and contractor were not able to show such unfairness or commercial unreasonableness. On the face of the court’s judgment, there is nothing to indicate that they sought to show that the flow of funds would be interfered with or jeopardized; and the court found that the monies due under the main contract could be paid into court so that no double payment would occur. The court was not impressed by any unfairness arising from paying a premium for the lien bond rather than paying the money into court. That was simply a business, cash flow and financing decision for the contractor. In the result, there was no commercial unreasonableness to the subcontractor’s assertion and, in the court’s view, much to support it in terms of keeping the monies due on the project in the payment pipeline.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 16, parts 4(m) and 6.

Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, 2015 SCC 43

Construction and builders’ liens – trust fund provisions – lien bonds

Thomas G. Heintzman O.C., Q.C., FCIArb                                   September 28, 2015

www.heintzmanadr.com

www.constructionlawcanada.com