No Representation Clause Precludes Reliance On Pre-Contractual Representation

In Houle v. Knelsen Sand and Gravel Ltd., 2016 CarswellAlta 1582, 2016 ABCA 247, the Alberta Court of Appeal has recently held that a “no representation” clause precluded a party from relying on a pre-contractual representation to rescind the contract.

Background

Houle owned a parcel of land in which Houle believed there were substantial gravel deposits. Houle contacted Knelsen about the potential sale of the land and provided Knelsen with a report of Silvatech Resource Solutions which had assessed the deposits and estimated there might be 444,850 tons of gravel in the land. Based on the Silvatech data, Knelsen’s manager concluded that the lands would yield 457,000 tonnes of gravel. After a series of negotiations, a price of $800,000 was agreed upon for the gravel rights, calculated at $1.60 per tonne for 500,000 tonnes, plus $1 per tonne for tonnage over 500,000.

The formal contract between the parties included the following clause:

“The Purchaser acknowledges that he has inspected the property and that he is purchasing the property as is and that there is no representation, warranty, collateral agreement or condition affecting the property or this offer other than as expressed herein in writing.”

In fact, there was much less gravel in the lands than expected. Knelsen extracted 74,000 tonnes of gravel, and estimated there was 25,000 to 30,000 additional tonnes on site, but that extraction of this amount would not be economical. Knelsen failed to make the final payment under the contract, and Houle sued. Knelsen counterclaimed, alleging breach of contract, negligent and innocent misrepresentation respecting the amount of gravel available in the land, and seeking rescission of the contract.

The trial judge granted rescission of the contract based upon an innocent misrepresentation.

Decision of the Alberta Court of Appeal

The Alberta Court of Appeal allowed the appeal and dismissed the action. Its reasoning was as follows:

  1. The estimate in the Silvatech report was not a representation of “fact”, but an opinion. The Court said:

  “As the trial reasons recognized, no one knew, or purported to know, how much gravel was actually in the land ….Neither the appellants, the respondent, Wapiti or Silvatech ever claimed or represented that there were in fact at least 500,000 tonnes of gravel, and it would have been reckless for any of them to do so. The cases relied on by the respondent are distinguishable. It is one thing to represent that an orchard for sale has 600 trees… and quite another thing to represent the quantity of a mineral buried underground. The Silvatech report can only reasonably be read as stating that, in the opinion of Silvatech and based on its professional analysis, it was more likely than not that there would be about 444,850 tons of gravel in the land. This was clearly an opinion, not a “fact”. Neither Silvatech (nor the appellants, vicariously) ever represented as a fact that there was any particular quantity of gravel present.

  1. The court said that “there is nothing objectionable about the whole agreement clause. It was a legitimate provision (found in most commercial contracts) confirming the scope of the agreement, and allocating the risks between the parties….The risk surrounding the actual quantity of gravel was well known to the parties….The respondent agreed to buy the appellants’ interest in the land “as is”. The appellants insisted on the whole agreement clause, at least in part to confirm that the risk arising from these unknown factors fell on the respondent purchaser.”
  1. The “no representation” clause disclaimed any “representation … affecting the property”. Those words:

“must be a reference to pre-contractual representations; post-contractual representations cannot affect the formation or terms of the contract. The trial reasons appear to assume that the whole agreement clause excludes negligent misrepresentations, but not innocent misrepresentations. There is no basis in law for that interpretation. It deprives the parties of the certainty the whole agreement clause was intended to deliver.”

  1. The “no representation” clause was wide enough to catch the representation about the quantity of gravel present in the lands: “There would be no point in excluding liability for non-actionable representations, and no reason to distinguish between innocent and negligent actionable representations, or between relief in contract or equity. The point of the whole agreement clause is that the obligations of the parties will be determined in accordance with the written terms of the contract, not extraneous negotiations and discussions that have not been reduced to writing, and thus formally acknowledged by the contracting parties.”
  1. There was no substantial failure of consideration: “there was gravel and a right to extract it.”

Discussion

This decision reflects the trend of Canadian courts to hold parties to their contractual deal about limitation and exclusion clauses, absent egregious facts or dealings. In this case, the “no representation” clause directly addressed the commercial risk relating to the amount of gravel in the land, a risk that both parties were aware of. There was nothing unfair in holding that the clause addressed the very risk to which it obviously applied.

It seems doubtful that the “whole agreement” part of the clause (“there is no….collateral agreement or condition …..”) would have been effective in the present circumstances. It was the “no representation” part of the clause (“there is no ….representation, warranty…) that was really applicable. But the present decision shows how powerful a combined “whole agreement/no representation” clause can be: the first part ensures that, so far as contractual claims and remedies are concerned, the parties cannot go beyond the written contract; and the second part ensures that the parties cannot assert tort or other non-contractual rights and remedies that are inconsistent with the contract.

The court’s discussion about whether the pre-contract statements were factual or opinions seems somewhat odd. If the statements were opinions, then they did not amount to representations unless Houle did not believe in their accuracy (and there was no suggestion of that in the reasons of the court). So if the statements were opinions, then the discussion of the “no representation” clause was unnecessary. If the statements were facts, then the discussion about opinions was unnecessary. In either event, part of this decision appears to be obiter dicta.

It is well to remember that a “no representation” clause is not effective against fraud. If pre-contractual statements are made which are fraudulent then the remedies of rescission and deceit will still be available, no matter what the contract says.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 4, part 3(f)(iii) and chapter 8, part 7.

Houle v. Knelsen Sand and Gravel Ltd., 2016 CarswellAlta 1582, 2016 ABCA 247

Contract – whole agreement and no representation clauses – pre-contractual representations – statements of fact or opinion

Thomas G. Heintzman O.C., Q.C., FCIArb                               October 30, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

 

 

Tort And Fraud Claims Fall Within Arbitration Agreement: Ontario Court Of Appeal

In Haas v. Gunasekaram, 2016 ONCA 744, the Ontario Court of Appeal recently held that claims in tort and fraud, and resulting claims to set aside the agreement between the parties, were within the jurisdiction of the arbitral tribunal under an arbitration agreement. Accordingly, the court action between the parties was stayed.

This decision is important due to the pro-arbitration principles of contractual interpretation which the Court of Appeal adopted, and due to its finding that the claims in tort and fraud – which are often found to fall outside arbitration clauses – were properly within the jurisdiction of the arbitral tribunal.

Background

The four parties to the actions were shareholders in a company which started a restaurant. They entered into a shareholders agreement which contained an arbitration clause. The arbitration clause read as follows:

If at any time during the currency of this Agreement, or after the termination hereof, any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator to be appointed by the parties to the dispute within ten (10) days of such referral… [underlining added.]

The restaurant failed and Mr. Haas brought an action against the other three shareholders claiming that he had been induced to enter into the shareholders’ agreement by fraudulent misrepresentations. The defendants brought a motion to stay the action, submitting that the claim must be dealt by way of arbitration. The judge hearing the motion dismissed it on the ground that Mr. Haas’ claims fell outside the arbitration agreement. The Court of Appeal allowed the appeal.

Decision of the Court of Appeal

The decision of the Court of Appeal contains the following elements:

  1. A broad interpretation should be given to the arbitration agreement. The court said:

    “The law favours giving effect to arbitration agreements. This is evident in both legislation and in jurisprudence……the statutory language in s. 7 of the current Arbitration Act is directory, not equivocal. It strongly favours giving effect to an arbitration agreement. This policy direction is reinforced by s. 17 of the Arbitration Act [which authorizes the arbitral tribunal to rule on its own jurisdiction]….. The same pro-arbitration orientation is found in the jurisprudence….  It is now well-established in Ontario that the court should grant a stay under art. 8(1) of the Model Law where it is ‘arguable’ that the dispute falls within the terms of an arbitration agreement…. [quoting from the decision in Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113 (B.C.C.A.), at paras. 39-40]: ‘Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings….Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal….’a deferential approach’ allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, ‘is consistent both with the wording of the legislation and the intention of the parties to review their disputes to arbitration.’”

  2. The court’s review of the misrepresentations alleged by Mr. Haas showed that they largely related to the defendants’ failure to perform their obligations under the shareholders’ agreement. There was only one alleged misrepresentation relating to conduct before the shareholders’ agreement, that the proposed location had a proven track record of successful restaurants. To establish his case, Mr. Haas would be relying on the contractual documents.
  3. The court considered that the arbitration agreement was “broad in scope.” It particularly referred to the words “if any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained.”
  4. The court held that tort claims do not automatically fall outside an arbitration agreement. As long as “either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it” or “the matter in dispute is referable to theinterpretation or implementation of some provision of the Agreement” or “the claim …relie[s] upon a breach of the contract as the source of the unlawfulness to ground” the claim, then a broadly based arbitration agreement applies. The court also echoed the caution cited in other cases that the court should “be wary of cases in which a party to an arbitration agreement seeks to avoid it by pleading a common law tort”
  5. The court also held that the plaintiff’s claim that fraud vitiated the agreement between the parties did not mean that the arbitral tribunal lacked jurisdiction. It just meant that the tribunal had the authority to decide that issue under section 17 of the Arbitration Act, 1991. That section enacts the competence-competence principle, namely that the arbitral tribunal has authority to decide its jurisdictional competence. In conclusion, the court said:

    “Put simply, in cases involving arbitration agreements, fraud does not necessarily vitiate everything. It is a matter of interpretation. The arbitration agreement in this case contains broad language, referring to “any dispute, difference or question…or any failure to agree…respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator. There is no exclusion for tort claims, misrepresentation or fraud.”

Discussion

The Court of Appeal’s finding that the arbitration agreement was a “broad” one is useful to those relying on arbitration agreements. The court might have taken a different view. The word “arise” is not as broad as, say, “relating to”, and the words “respecting this Agreement or anything herein contained” could arguably limit the arbitration to contractual disputes, and nothing more. Nevertheless, the court held that these words established a “broad” arbitration clause.

The Court of Appeal’s conclusion that tort and fraud claims fall within the arbitration clause – at least to the extent of the arbitral tribunal’s entitlement to first determine whether they do – is very significant. This decision effectively over-rules or calls into question prior lower court decisions that, in less arbitration-friendly days, held to the contrary.

The key to the decision is, of course, the competence-competence principle. Once the tort and fraud claims arguably fall within the arbitration agreement, then the court must allow the arbitral tribunal to first decide whether they do or not. At that point, the court’s work is done, until the tribunal makes a decision on that issue which is brought back to the court for review. It is the direction of the legislature in section 17 of the Act – adopting the competence-competence principle –and the obligation of the court to apply that principle that results in the modern “hands off” attitude of courts toward arbitration. That attitude is one of the defining elements of the modern law of arbitration.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, parts 7 and 8.
Haas v. Gunasekaram, 2016 ONCA 744

Arbitration – jurisdiction of the arbitral tribunal – competence-competence – stay of court proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                      October 23, 2016

www.heintzmanadr.com
www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

Standard Form Contracts Are To Be Reviewed On A Standard Of Correctness: Supreme Court Of Canada

In, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37, the Supreme Court of Canada has held that the interpretation of a standard form contract is a matter of law alone, and not a matter of mixed fact and law. Accordingly, it is not sufficient for a judge to arrive at a reasonable interpretation of a standard form contract: the interpretation must be correct or it may be set aside by an appellate court.

In this respect, the Supreme Court has decided that a different standard of review applies to standard form contracts than for contracts generally. In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court held that a decision of an arbitrator interpreting a contract amounted to a matter of mixed fact and law, and not just a question of law. Accordingly, the Supreme Court held that the B.C. Court of Appeal had no jurisdiction to grant leave to appeal on a matter of law from a decision of a trial court upholding the arbitral award.

So, in Canada there are two kinds of contract which involve two different kinds of contractual interpretation:

General contracts; The interpretation of these contracts amounts to a question of mixed fact and law. Appellate courts will show great defence to a trial judge’s decision interpreting the contract.

Standard form contracts: The interpretation of these contracts amounts to a question of law alone. Appellate courts may reverse the trial judge’s decision if that decision is not correct.

For those involved in arbitration, the question is whether these two standards will be imported into the review of arbitral decisions.

The Supreme Court’s decision in Ledcor v. Northbridge also contains an extremely important ruling with respect to the exclusion for faulty workmanship contained in most Builders’ Risk insurance policies. This aspect of the decision was discussed by me in an article dated September 17, 2016. The present article addresses the “standard of review” issue.

Background

As discussed in my previous article, the Ledcor v. Northbridge case arose from damage done to the windows of a building under construction. Before the project was completed, the owner hired cleaners to clean the windows. The clearers used improper tools and methods and scratched the windows. The windows had to be replaced and the building’s owner and the general contractor claimed the replacement cost under the Builders’ Risk insurance policy covering the project. The insurers denied coverage, asserting that the claim fell within the policy’s exclusion for the “cost of making good faulty workmanship”.

The Alberta trial judge held that the clause was ambiguous and applied the contra proferentem rule to find that the claim was not excluded. The Alberta Court of Appeal reversed the trial judge’s decision. It concluded that the damage to the windows was excluded because it was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work.

Accordingly, the appeal before the Supreme Court of Canada involved the application of two sets of principles.

First, the principles relating to the interpretation of contracts – in this case, an insurance contract.

Second, the principles to be applied to an appellate court’s review of a lower court’s decision interpreting a contract. It is this second aspect of the Supreme Court’s decision which is notable because the court applied a different standard of review than it had very recently pronounced in Sattva.

The Sattva Decision

In Sattva, the Supreme Court held that the interpretation of a contract is a question of mixed fact and law. Because a contract is negotiated in a factual setting, the interpretation of the contract is not just a matter of examining the words of the contract, but also examining the facts which gave rise to the contract.

Under s. 31(2) of the British Columbia Arbitration Act, the arbitrator’s award could only be appealed if the appeal raised “questions of law”. The judge of the B.C. trial division dismissed the appeal from the arbitral award, holding that the interpretation of the contract by the arbitrator raised a question of mixed fact and law, not a question of law. The Supreme Court agreed with that view. Accordingly, the Supreme Court held that the B.C. Court of Appeal erred in hearing the appeal since there was no question of law properly before the Court of Appeal over which that court had jurisdiction.

The Ledcor decision

In Ledcor, the majority of the Supreme Court held that the reasons for its decision in Sattva do not apply to the interpretation of a standard form contract, for several reasons.

First, there is no relevant factual matrix in which a standard form is signed. A standard form contract is prepared by one party and presented to the other side on a “take it or leave it” basis, with little or no negotiation between the parties. In the absence of a relevant factual matrix that could influence the proper interpretation of the contract, the interpretation should be characterized as a matter of law.

Second, the interpretation of a standard form contract applies to all users of that contract. The contract cannot have a different meaning for some parties than for others. For this additional reason, the interpretation of the contract should be seen as a matter of law. This is particularly so for insurance contracts which are usually prepared as “standard form policies” and are provided by the insurer to the insured without negotiation, except as to the amount of the premium.

Third, a standard of correctness properly sorts out the responsibilities of trial judges and appellate courts. The function of trial judges is to make factual finding. The function of appellate courts is to decide legal principles that will be applied by and to society at large, and not just those who are parties to the immediate dispute. In this setting, it is more appropriate that the review by an appellate court of a trial judge’s interpretation of a standard form contract be conducted on a standard of correctness. As the majority said, “ensuring consistency in the law and reforming the law” is the function of appellate courts.   By “selecting one interpretation over the other as correct” the appellate court provides “certainty and predictability.” For all these reasons, there is one correct interpretation of a standard form contract, and if the trial judge does not come to the correct conclusion, then the appellate court may set it aside.

Justice Cromwell dissented. In his view, all contracts have a factual matrix. Even standard form contracts involve surrounding facts, including the market, industry or setting in which they exist, their purpose, the parties’ reasonable expectations and commercial reality, etc. For this reason, there is not a sufficient generality associated with a standard form contract to turn its interpretation into a question of law.

Discussion

There are a number of interesting aspects to the Ledcor decision.

First, one may ask whether it is a practical or commercially sensible to differentiate between general contracts and standard form contracts. What if the contract is partly standard form and partly negotiated? Does the “correctness standard apply to part of the contract, or part of the judge’s decision, but not to the balance? Can the two parts be separated?

Second, what amounts to a “standard form contract” for the purposes of Ledcor? This is an important issue in the construction industry. “Standard form” construction contracts, such as the CCDC contracts prepared by the Canadian Construction Document Committee, are not prepared by one party or one side of the industry and presented to the other on a “take it or leave it” basis. Rather, they are prepared by the consensus of the participants on all sides of the construction industry. Are these contracts “standard form contracts” within Ledcor?

Third, does the Ledcor decision apply to the review of arbitration awards involving standard form contracts? The Ledcor decision involved appellate review of a trial court decision, and the majority of the Supreme Court decided that that review should have been conducted on a correctness standard. One of the factors in its decision was the relationship between trial judges and appellate courts which, in the Supreme Court’s view, supported a correctness standard of review. In Sattva, the original decision being reviewed was an arbitral award that was appealed to the superior court. The Supreme Court ultimately decided that appellate review of the superior court’s decision did not involve a pure question of law, but a question of mixed fact and law. Does the fact that Sattva originally involved an arbitration decision and Ledcor originally involved a court decision make a difference? And if an arbitrator is dealing with a standard form contract, as opposed to a negotiated contract, does that make a difference?

Some provincial arbitration statutes allow the parties to appeal an arbitral award on a question of law, sometimes by agreement of the parties or with the court’s leave. Sattva involved such a statute, and the Supreme Court of Canada held that leave to appeal the trial court’s decision reviewing the arbitral award should not have been granted under the B.C. arbitration statute since the interpretation of the contract in question did not involve a question of law, but rather a question of mixed fact and law. If the contract had been a standard form contract, would the interpretation of the contract now be a matter of law under Ledcor?

In addition, are the roles of a judge and arbitrator in interpreting a contract, and is the relationship of a judge and arbitrator to an appellate court, the same? Is the arbitrator, even though selected by the parties and selected because of his or her expertise and knowledge of the industry, bound to approach the interpretation of the contract in exactly the same way as a judge?

In the net result, is a decision of an arbitrator under a CCDC contract reviewable by a court on a standard of correctness? If so, the “hands off” approach of courts toward arbitration, which has been the trend in arbitration law over the last twenty years, may be changed by Ledcor.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 11, part 11.

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37

Contracts – interpretation of contracts – standard of review – questions of law and mixed fact and law

Thomas G. Heintzman O.C., Q.C., FCIArb                             October 10, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

Is The Charge Or Lien Against The Holdback Separate From The Lien Against The Land?

Summary

In the recent decision in Brook Construction (2007) Inc. v. Blackwood Contractors Ltd, the Newfoundland and Labrador Court of Appeal held that the charge against the holdback under s.12(5) of the Newfoundland and Labrador Mechanics’ Lien Act (the NL Act) is the same as, and “parasitic” to, the lien against the land.

Accordingly, since the subcontractor did not have a lien against the land – because the land was owned by the Crown – the subcontractor also did not have a lien against the holdback held by the owner.

The British Columbia Court of Appeal arrived at the opposite result in its 2003 decision in Shimco Metal Erectors Ltd. v. Design Steel Constructors Ltd.

In that decision, the B.C. Court of Appeal held that under s. 4(9) of the B.C. Builders Lien Act (the BC Act), the lien against the holdback is a separate and distinct lien and might be asserted even though the subcontractor had not commenced an action within the time to assert a lien against the land.

Can these decisions be rationalized? What is the law on this subject in the other provinces?

Reasoning of the Newfoundland and Labrador Court of Appeal

In Brook Construction, the majority of the Newfoundland and Labrador Court of Appeal arrived at its decision for the following reasons:

  1. Section 12(5) of the NL Act, which creates the charge upon the holdback, starts with the words “Where there is a lien under section 6”. In the view of the majority of Newfoundland and Labrador Court of Appeal:

“Section 6 is the provision that creates the statutory lien. Without its operation, there would be no claim on the land benefitted by the work. The right to the lien on the holdback is parasitic upon the existence of a lien on the benefitted land.” (underlining added)

  1. The NL Act does not contain a trust fund section. Accordingly, the rationale for imposing a charge against the holdback is not as persuasive in Newfoundland and Labrador as it is in provinces, such as New Brunswick, in which a trust fund provision exists. In provinces like New Brunswick, the trust fund section was introduced into the lien statute precisely because the charge upon the holdback was dependent on the lien against the land. So in Newfoundland and Labrador, where there is no trust fund section, the parasitic nature of the charge upon the holdback must be recognized.
  1. Accordingly, since Crown land is not subject to a lien in Newfoundland and Labrador, a lien against the holdback cannot arise if the building is on Crown land.

The majority of the Newfoundland and Labrador Court of Appeal also held that, even if a charge against the holdback could arise under the NL Act, the subcontractor was obliged to sue the Crown which held the holdback. Even if (contrary to the majority’s conclusion) the lien against the holdback might otherwise exist, that lien was discharged since the subcontractor did not sue the Crown.

Justice Welsh dissented. He held that the combined effect of sections 5 and 12(5) of the NL Act is that the Crown is subject to that Act. This conclusion flowed from the exception to lien rights stated in those sections for roads and highways. That exception in the NL Act necessarily meant that Crown land was otherwise subject to the Act. Due to this conclusion, Justice Welsh did not determine whether the holdback charge is a separate or a “parasitic” lien.

Neither the majority nor minority of the Newfoundland and Labrador Court of Appeal referred to the decision of the BC Court of Appeal in the Shimco case.

Reasoning Of The BC Court Of Appeal

In Shimco, the BC Court of Appeal arrived at the opposite conclusion to that reached by the majority of the Newfoundland and Labrador Court of Appeal, for the following reasons:

  1. Sub-section 4(9) of the BC Act states that “a holdback required to be retained under this section is subject to a lien under this Act. “ The sub-section does not say “the lien under the Act.” The use of the words “a lien” suggests that the lien against the holdback is different than the lien against the land created by section 2.
  1. If the lien against the holdback was dependent on the lien against the land, then the second part of sub-section 4(9) would not have been necessary or inserted. That part reads: “…each holdback is charged with payment of all persons engaged, in connection with the improvement, by or under the person from whom the holdback is retained.”
  1. The lien against the holdback is of a different nature and potentially benefits a different group of persons than the lien against the land.

The lien against the holdback is a monetary and trust remedy. That lien is for the benefit of all persons who have improved the land and applies to all persons, including the owner or contractor, who hold a holdback under the project.

The lien against the land is a real estate remedy and applies to the owner.

When the owner acts as its own contractor, the lien against the land could have different consequences than the lien against the holdback: there will be as many holdbacks as there are contractors because there will be a separate holdback under each contract, but all of the subcontractors will have a lien against the land irrespective of which contractor engaged them.

  1. Sub-section. 8(4) of the BC Act reinforces the existence of a separate lien upon the holdback. That sub-section states as follows:

“8(4) Payment of a holdback required to be retained under section 4 may be made after expiry of the holdback period, and all liens of the person to whom the holdback is paid, and of any person engaged by or under the person to whom the holdback is paid, are then discharged unless in the meantime a claim of lien is filed by one of those persons or proceedings are commenced to enforce a lien against the holdback.” (underlining added)

The underlined words acknowledge that there is a separate lien against the holdback which is not otherwise extinguished if a timely action to enforce the lien against the holdback is commenced.

  1. There is nothing awkward or impractical about the conclusion that the holdback lien is different than the lien against the land. Subject to the other provisions of the Act, owners and contractors holding amounts falling within the lien regime can (so far as the holdback lien is concerned) pay them out until an action is commenced to enforce the holdback lien. While, under the holdback lien provision, the subcontractors under a particular contractor will have to share the holdback with all subcontractors who have commenced actions to enforce their holdback lien, and not just with those who have preserved and protected their lien against the land, there is nothing inherently unfair in that result.

Discussion

It seems inherently impracticable to have different regimes across Canada for the holdback charge or lien. It also seems unlikely that the provincial legislatures intended to have different regimes. However, each provincial lien statute must be individually interpreted to determine whether the holdback charge or lien stands or falls with the lien against the land. Until the Supreme Court of Canada considers this issue or provincial legislatures make the holdback lien provision uniform across Canada, different holdback lien regimes may continue to exist.

The Supreme Court of Canada did consider the charge against the holdback in Westeel-Rosco Ltd. v. South Saskatchewan Hospital Centre, 1976 CarswellSask 114, [1977] 2 S.C.R.. There, the Supreme Court held that a waiver of the lien did not constitute a waiver of the holdback charge, but only of the lien against the land. The waiver read as follows:

“do hereby renounce and waive any right, which …….. have or may have to any lien for work done, services rendered or to be rendered, or materials supplied or to be supplied, for or in connection with the building now in course of construction upon the said land hereinafter described and any and all right to register a claim of Lien against the said land or building,…” (underling added)

Despite the apparent all-inclusive wording of the underlined words, the Supreme Court held that this waiver did not affect the holdback charge, only the lien against the land. Does this holding suggest that the holdback charge and the lien against the land are separate encumbrances? This decision was not referred to in either the Brook Construction or Shimco decisions.

In this state of affairs, what regime will be held to apply in provinces other than B.C. and Newfoundland and Labrador?

It should be first noted that the BC Act is the only provincial lien statue in which the relevant section (section 4(9) in the BC Act) states that the holdback is subject to a “lien” on the holdback. That sub-section then states that “each holdback is charged” with payment of all persons engaged on the improvement. In the other lien statutes, the relevant section states that the holdback is subject to a “charge” on the holdback. This wording may distinguish the BC Act from all the other lien statutes. However, In Brook Construction, the Newfoundland and Labrador Court of Appeal referred to the holdback charge as a “lien against the holdback”, so this distinction in the statutory wording between “charge” and “lien” may not be significant.

The result arrived at in BC may most likely apply in the Northwest Territories, Nunavut and the Yukon where the holdback lien is stated to be “In addition to all other rights or remedies given by this Act.” It might also apply in Manitoba where the holdback lien section states that a person who has “a lien” has “a charge” on the holdback, thereby using the “a lien” wording upon which the BC Court of Appeal relied. In some provinces, such as New Brunswick, the definition section states that “lien” means “a lien created by this Act”, thereby possibly introducing the concept that there is more than one lien created by the Act. Other lien statutes, such as Nova Scotia and Ontario, use the words “the lien”, suggesting that there is only one lien, of which the holdback charge is a part. In those provinces or territories which do have a trust fund section in their lien statute, it may also be more likely to be found that the holdback charge is a self-standing charge.

The issue of whether the holdback charge or lien is a separate lien or a lien dependant on the lien against the land, has a number of consequences.

First, if the project involves land against which no lien may be asserted, then if the holdback lien is dependent on the lien against the land, no holdback lien can be asserted for that project unless the legislation provides to the contrary. That is what the majority of the Newfoundland and Labrador Court of Appeal held in Brook Construction.

Section 16(3) of the Ontario Act deals with this situation by providing that where “the lien” does not attach to the land (because the Crown is the owner or the land is a public street or highway owned by a municipality or a railway right of way), the lien constitutes “a charge” on the holdback, and section 34(1)(b) then provides for the preservation of the lien –so far as the charge on the holdback – by notice to the owner of the land, rather than registration of the lien.

A similar provision to section 34 of the Ontario Act is found in other provincial lien statutes. In Newfoundland and Labrador, it is found in section 22(5) of the NL Act, which reads as follows:

(5) Where there is no lien on the land by virtue of section 5, a person who is asserting a claim under subsection 12(5) for work done or materials placed or provided shall give written notice of his or her claim to the owner, to every person in whose hands sums are retained under section 12 to which his or her claim may relate and to the municipal authority in whose area of authority the land is situated within 30 days after the completion or abandonment of the work or the placing or providing of the materials.

The majority of the Newfoundland and Labrador Court of Appeal in Brook Construction referred to section 22(5) in support of its conclusion that the owner must be sued in order for the holdback charge to be operative. However, section 22(5) did not apply to the case since section 5 precludes a lien in respect of public streets, roads and highways, not other Crown land as was involved in that case (a school). The underlined words recognize that a holdback charge may exist when the improvement is to a public street, road or highway even if there is not a lien against the land.

Second, if the holdback lien is dependent on the continued existence of the lien against the land, then unless the lien legislation provides otherwise the lienholder may have to protect the holdback lien by registering the lien against the land, and may have to preserve the lien against the land by starting an action (and include the owner as a party). If this is the situation, a person seeking to enforce the charge against the holdback will not be able to ignore the lien registration and preservation stages.

Furthermore, if the holdback lien is not dependant on the lien against the land, there is the further question of whether the holdback lien action must be commenced within the time specified in the provincial lien statue, or the time provided in the general limitations statute for the commencement of a civil action. Logically, it would seem to be the latter, but that might cause real problems for the cash flow on a construction project.

In Shimco, the plaintiff had registered a lien and started its action within the one year period provided in the BC Act for the commencement of an action in relation to a lien against the land, but had failed to register a certificate of pending litigation within that one year period with the result that the Land Title Office had removed its lien claim of lien from the title to the property. Nevertheless, the BC Court of Appeal held that the holdback claim was valid.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, part 5

Brook Construction (2007) Inc. v. Blackwood Contractors Ltd., 2015 CarswellNfld 100, 47 C.L.R. (4th) 1 (N.L.C.A.)

Shimco Metal Erectors Ltd. v. Design Steel Constructors Ltd., 2003 CarswellBC 649, 2003, 23 C.L.R. (3d) 163 (B.C.C.A.).

Construction and Builders’ Liens –Lien against the hold back – whether the holdback lien is a separate lien from the lien against the land

Thomas G. Heintzman O.C, Q.C., FCIArb                             October 2, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.