Case Review – High Performance Energy Systems Inc. v. Halifax (Regional Municipality), 2023 NSCA 16

 

Lessons Learned

No decision better demonstrates the bow wave of unnecessary destruction and expense that expands in the wake of emotionally-fuelled squabbling. It destroys viable contracts and viable businesses, and in this case led to 14 years of litigation, the outcome of which should have been apparent before the first pleading was filed.

Construction

In September 2007, the municipal government of Halifax contracted High Performance Energy Systems to design and construct cooling and heating systems for Alderney Gate, a building that houses municipal government offices, a public library, and the Halifax Transit ferry terminal.

The fixed-price contract between Halifax and High Performance stipulated that upon substantial completion by High Performance, a 20-year capital lease agreement would come into effect through which High Performance would operate and maintain the retrofits and advanced energy system.

By February 2009, High Performance’s work on the project had effectively halted due to “hopeless” financial disputes between its three principals, whom a lower court found had engaged in an internal quarrel marked by “dubious” and “outrageous” tactics while neglecting the critical legal and accounting problems facing the company.

Its major customers became exasperated with the results. When the three principals found themselves bickering over responsibility for the work stoppage in front of Julian Boyle, the municipal engineer serving as Halifax’s municipal liaison with High Performance, he was aghast at the implied state of the company and told them they were like “[c]hildren playing in the playground…and arguing about whose ball it is”. Boyle demanded that High Performance immediately employ a project manager as they had been contractually obligated to do.

When no project manager materialized and work did not recommence, Halifax notified High Performance that it was in default of the contract a month later, in March 2009, was advised of High Performance’s insolvency in April, and terminated the contract in May. Halifax completed construction itself over the course of the next year at a cost of about $700,000.

Shortly after termination, two of the principals submitted a trio of invoices on behalf of High Performance for a total of $3,681,620, an “astonishing” amount that implied a claim by High Performance that it had achieved substantial completion, even in the face of the work stoppage and contract termination, and that contained hundreds of thousands of dollars of entries for unauthorized extras.

Litigation

By June 2009, subcontractors of High Performance had filed liens seeking payment of outstanding invoices from High Performance to the cumulative tune of approximately $202,000.

A year later, in July 2010, High Performance and two of its principals filed an application against the third, James Bardsley, seeking relief for shareholder oppression pursuant to the Companies Act (RSNS 1989, c 81), including permission for the two principals to bring a derivative action in the name of High Performance against Halifax to pursue any claims arising from the Alderney Gate contract.

In November 2010, an interim application judge – noting that the parties disagreed over whether the contemplated action contained a valid claim, and thus whether it was in the interest of High Performance to pursue – denied that particular request in order to preserve the status quo until a decision could be rendered when the main application was heard.

However, the interim application judge did take steps to settle the chaos inflicted by the ongoing quarrel by ordering:

  1. the appointment of a chartered accountant to prepare financial statements;
  2. the imposition of duties to co-operate with the accountant;
  3. appointment of an auditor;
  4. the imposition of duties to cooperate with the auditor; and
  5. a freeze on all payments to directors, including salary and for expenses incurred before the order, excepting trade payables, non-director employee salaries, and expenses approved unanimously by the directors.

All three principals defaulted on the order almost immediately, much to the ire of the main application judge:

Bardsley engaged in outrageous tactics again…Mr. Stewart and Mr. Beaini engaged in unfair tactics against Mr. Bardsley, tactics that were violations of the very order they had obtained. The chartered accountant appointed by the court was unable to complete his work. No audit was ever done. To this day, the principals have no understanding of the serious impediment financial disorganization caused to their venture.

Analysis

Receivership & Summary Judgement

PricewaterhouseCoopers was appointed receiver for High Performance in September 2013, and in January 2015 High Performance commenced a crossclaim against the municipality of Halifax in the subcontractors’ builders’ lien action, seeking contribution and indemnity from Halifax for any damages payable to the subcontractors.

A motion judge subsequently granted a summary judgement allowing Halifax’s limitations defence against a claim of contractual breach, dismissing High Performance’s claim against Halifax on the basis of unjust enrichment, and striking out High Performance’s defence.

Court of Appeal

High Performance found no greater sympathy at the Court of Appeal.

The limitations issue arose from a delay of more than five years before High Performance filed its claim against Halifax. High Performance attempted to argue that its “corporate incapacity” due to the internal war that had raged between its principals kept the limitations period from running, which the Court treated exactly as courts typically treat arguments unsupported by authority, never previously recognized at law, and advanced by a party clearly running a deep deficit in terms of equity.

Regarding the motion judge’s decision to strike the High Performance statement of defence (which alleged that Halifax might bear some responsibility to pay the $202,000 claimed by the subcontractors High Performance had hired), the Court of Appeal clarified that there were no material facts in dispute that might have established any such responsibility on the part of Halifax: there was no direct contract between the subcontractors and Halifax, and High Performance had already acknowledged the amounts claimed by the subcontractors were valid.

The Court likewise affirmed the motion judge’s decision to bar High Performance from claiming unjust enrichment. The Court clarified that the unjust enrichment claim had not been dismissed because of limitations issues, but rather because a contract existed: unjust enrichment was not even sufficiently viable to subject to a limitations analysis because the contractual breach provides a reason for the enrichment that precludes equitable relief. To wit, the following passage from Caglar v Moore, 2005 CanLII 39871 (ONSC), which the Court quoted:

Where there exists a contract under which parties are governed, and one party gains by a breach of the same, that party is not truly enriched, because the breaching party takes that gain subject to its liability for breach of contract. If the other party does not sue within the time set out in the Limitations Act, then, without more, there is a juristic reason for the gain because the breaching party is entitled to rely on the intended limitation.

However, unjust enrichment was not developed simply to provide an alternative remedy to that offered by the contract, without more. Otherwise, the remedy would impact directly on the rights of all parties to rely on the normal limitation period for breach of contract.

…

Allowing the claim for unjust enrichment in this case would mean that every time a limitation period for breach of contract expires, a plaintiff can rely on unjust enrichment, since the very nature of time limitations results in a benefit to one party and deprivation to the other. As a result, not only would the statutory laws creating limitations of action be circumvented, but the whole area of contractual damages would be undermined. The contract was a juristic reason for any enrichment in the case at bar, given that notice was contemplated by it, and the limitation period for an action for the breach has expired.

Case Review – Avli BRC Developments Inc. v. BMP Construction Management Ltd., 2023 ABCA 147

 

Lessons Learned

  1. Take advantage of the intended efficiencies of builders’ lien procedure by cooperating with other lienholders and the court to streamline filings and applications.
  2. If registering a lien against condominium common property – which will be the vast majority of work performed on a typical condominium building – register a lien against the certificates of title for all of the condominium units.
  3. If attempting to invalidate a lien, assert prejudice and provide evidence of that prejudice.

Construction

Avli BRC Developments Inc. owns land in the trendy inner-city Calgary neighbourhood of Inglewood, on which it began developing an apartment-style condominium in 2019. Avli contracted BMP Construction Management Ltd. to act as construction manager, and BMP entered into multiple subcontracts for work and materials.

In October 2019, after construction on the condo apartment was underway, Avli registered its condominium plan with the Land Titles Registrar, at which point Avli’s ownership of the land converted from a single certificate of title to separate certificates of title for the individual condo units, each of which contained a partial interest in the common property. The registration also created a numbered condominium corporation to manage the common property pursuant to the Condominium Property Act, but Avli did not appoint a board of directors for it as is also required by the Act.

Preliminary Litigation

A month later, the relationship between Avli and BMP soured over allegations of deficiencies. BMP invoices went unpaid, construction stopped, and BMP in turn failed to pay the invoices of subcontractors and suppliers.

Predictably, the liens flew from all quarters, including a lien registered by a sub-sub-contractor. Avli brought an application pursuant to section 48 of the Builders’ Lien Act (since then, replaced by the Prompt Payment and Construction Lien Act, RSA 2000, c P-26.4) and by November 2020 had obtained an order allowing it to post security in the form of lien bonds in exchange for the removal of the liens from title.

Proceedings complicated and duplicated. Some parties had filed the statements of claim and certificates of lis pendens within the 180 days required by the Builders’ Lien Act. Others had not and their liens ceased to exist, which prompted a successful application by Avli for (i) a declaration that those liens were not valid and (ii) a proportionate reduction in the amount of the lien bond they’d posted as security.

Of those liens that remained, most had been filed under separate statements of claim. Some parties had successfully applied for an order declaring their liens valid, some had not, and of those who had not, Avli contested the validity of some. By the time the matter was heard before a master in April 2021, the issues had expanded to also include multiple applications for declarations of a valid lien, multiple applications for summary judgment by some but not all subcontractors against one or both of Avli and BMP, and the issue of whether an interim or final payment could be made from the lien fund to the subcontractors, resulting in no fewer than eighteen court files before the master presiding at the hearing.

Initial Hearing

Procedure

Master Robertson acting as application judge (Avli BRC Developments Inc. v. BMP Construction Management Ltd., 2021 ABQB 412) began his analysis by observing that section 50 of the Builders’ Lien Act should have prevented this procedural situation, as it states that “all persons named as parties in the statement of claim and all registered lienholders are parties to the proceedings”, including – in his interpretation – proceedings under section 48 for removal of a lien: “that is,” Master Robertson wrote, “each lienholder is a party to every other lienholder proceeding.  Each lien claimant should be entitled to obtain a certificate of lis pendens in the first action commenced by any lien claimant on the project.”

The master regretfully observed that because no established practice existed to facilitate this intent of the Builders’ Lien Act, “everyone usually starts their own lawsuit”. He directed that all further applications relative to the Inglewood condo project be brought under the action commenced by the originating section 48 application only, since that action contained the lien funds posted by Avli.

Liens Against the Additional Sheet

The major material issue at the hearing was the validity of certain liens containing errors, real or apparent, including several filed only against the additional condominium sheet without naming any specific condo unit.

As explained by Master Robertson, per the Condominium Property Act Regulation the Registrar may add additional “sheets” to a condominium plan to record any prospective or possible future endorsement, registration, memorandum, or notification that might be applied to the plan, including a lien.

A lien registered on the additional sheet is deemed to be also registered against the certificate of title for each unit by the Condominium Property Act, but only if the work/materials were supplied “on the request of [the] corporation”.

Therein the rub: Avli had never appointed a board of directors for the condo corporation, and only the board of directors of the condo corporation is entitled to order work be done on the condo’s common property, not the owners of the individual units. This encompasses effectively all of the work in question, pointed out Master Robertson, since the reality is that except for items like interior unit paint, most of a condo apartment is composed of common property:

The roof is common property. The walls (other than interior partitions) are common property. The entrances and elevators are common property. The hallways are common property. The walkways leading to the entrances are common property. The demising walls separating the units are common property.

Avli argued that the work it requested was in its capacity as developer, not on behalf of the condo corporation, and that since Avli owned every unit through its individual title once the plan was registered, liens against Avli needed to be applied against every individual unit to be valid.

Master Robertson observed that the Condominium Property Act does not excuse the developer from further responsibilities for the construction of the project once the condo plan is filed, and concluded that in the absence of an appointed board of directors, one of those responsibilities must have been for Avli to act in the role of an interim board: the absurd alternative was that for the month after the filing of the condo plan where construction continued, everyone on site, including Avli as owner of all of the units, was trespassing on common property and performing unauthorized work.

Consequently, Master Robertson determined that the corporation must be found in the circumstances to have fully ratified and adopted all of the terms of the construction contract between Avli and BMP, in effect requesting that the work be completed and giving validity to liens against Avli filed via the additional sheet.

Other Lien Errors

Master Robertson noted that apart from the requirement that an actual registration occur, failure to follow any of the requirements of the Builders’ Lien Act regarding how a lien is to be registered does not necessarily invalidate it: substantial compliance is enough so long as no prejudice arises to (e.g.) an owner, contractor, subcontractor, or mortgagee from the failure. Even then, the lien is only invalidated to the extent that the person impacted is actually prejudiced by the failure.

Avli advanced no evidence suggesting that it had actually been prejudiced by any of the concerns it had raised about irregular registration.

Master Robertson reflected on the reality that builders’ liens are often registered by the subcontractors themselves without the assistance of lawyers, as was in fact the case for some of the lien claimants before him, and none of the documents a subcontractor typically receives (e.g. a purchase order, contract, change order, etc.) will normally disclose the legal description of the property. Ascertaining the correct legal description is made even more difficult after a condominium plan has recently been registered, since a claimant against all of the common property and units must then try to find out how many units there are in total, and on which units the claimant actually worked or provided materials for.

Since all of this must be done within 45 days of the work’s abandonment or completion, a deadline for which the proper calculation is itself not always obvious, Master Robertson explains that the Builders’ Lien Act was intentionally written to accommodate some error. In the case at bar, some of those errors included one subcontractor naming the condo corporation instead of Avli as the owner of the interest claimed against and two others only registering their lien claims against a single unit, even though almost all of their work was actually on the common property.

Master Robertson clarified that it does not count as prejudice for the purpose of substantial compliance that Avli would have less money remaining in the lien fund, since that is a natural consequence of any use of substantial compliance to cure an error in a lien filing: prejudice only occurs where someone was misled and did anything to their detriment in consequence, and noting again the lack of evidence of prejudice to Avli by that definition, declared the liens in question valid.

Master Robertson concluded with a cautionary note that if there had hypothetically been a sale of the project to pay the lien claims or if the lien fund had been inadequate and a pro-rata payout had occurred, prejudice against the other lien claimants would likely have reduced what otherwise would have been recovered by a correctly-executed lien filing.

Court of Appeal

Master Robertson’s decision was upheld by the chambers judge on appeal and has now been upheld by the Court of Appeal. The appellate decision’s general tone and its repeated mention of the deferential standard of review suggests the affirmation was not a perfectly enthusiastic endorsement, and that had the facts on the record been even slightly different, the appeal may very well have had a different outcome.

The Court makes its preference clear that in similar cases in the future where the subject of the lien is work against condominium common property, parties file liens against title to all individual condo units, not a single unit or only the sheet. Out of an abundance of caution the Court allows that a lien claimant may also wish to register their lien against the additional sheet, but relying solely on such a filing is neither advised nor straightforward in terms of its impact on the resolution of the lien dispute.