The Wait is Over: Regulations Have Been Released and Alberta’s Prompt Payment and Construction Lien Act comes into force August 29, 2022

On February 25, 2022, the Government of Alberta confirmed that the Prompt Payment and Construction Lien Act (the “PPCLA”)[1]Prompt Payment and Construction Lien Act, c P-26.4 [Prompt Payment Act]. will come into force on August 29, 2022,[2]Builders’ Lien (Prompt Payment) Amendment Act, 2020, c 30; Proclaiming the Builders’ Lien (Prompt Payment) Amendment Act, 2020, OC 50/2022. and published the long-awaited Prompt Payment and Adjudication Regulation and the Prompt Payment and Construction Lien Forms Regulation (collectively the “Regulations”).[3]Prompt Payment and Adjudication Regulation, Alta Reg 23/2022 [Prompt Payment Regulations] and Prompt Payment and Construction Lien Forms Regulation, Alta Reg 22/2022. [Forms Regulations]. As discussed in our previous post, participants and stakeholders in Alberta’s construction industry have been in a state of limbo since 2020, awaiting the coming into force of the PPCLA and the major changes it contains. Most notably, several new provisions in the PPCLA left much of the interpretive heavy lifting to the Regulations. With the coming into force of the PPCLA now confirmed and the publication of the Regulations providing necessary detail, parties can now take steps to ensure they are fully prepared for these major changes.

As outlined in our initial post from November 2020, the PPCLA will change the construction industry in four main ways, by: (i) instituting prompt payment timeline requirements; (ii) allowing for progressive release of holdbacks; (iii) creating an adjudication system; and (iv) extending the default periods for filing a lien. While the PPCLA sets out the major changes, the Regulations provide the necessary detail to fill in the gaps and make these changes functional.

The highlights from the Regulations include:

  1. New transition rules: the PPCLA provided that only contracts entered into after the PPCLA was proclaimed would be subject to the significant updates brought about by Bill 37 and Bill 62 (most notably, the prompt payment and adjudication regimes). The Regulations now provide that contracts entered into before the PPCLA is in force, but that are scheduled to remain in effect for longer than 2 years after August 29, 2022, must be amended within 2 years to indicate that they are subject to the PPCLA.
  2. Inclusion of engineers and architects: the Regulations stipulate that engineers and architects’ services are subject to the terms of the PPCLA where those services relate to an improvement.
  3. Adjudication process: details concerning the adjudication process have been given, the most salient of which is that a decision is to be made within 42 days of a notice of adjudication being filed and served (subject to an adjudicator extending the process by up to 10 days). Adjudicators will be appointed within 7 days of the adjudication notice, the claimant must submit its materials within 5 days of the adjudicator being appointed, and the respondent must submit its materials 12 days after it receives the claimants’ materials.
  4. Prescribed amount for progressive release of holdbacks: The PPCLA requires contracts which have a value over the prescribed amount to provide for a progressive release of the statutory holdback at least annually. The regulations set the prescribed amount at $10,000,000.

 

Prompt Payment Timeline

Pursuant to the PPCLA, the new prompt payment requirements are as follows:

  • the prompt payment timelines are triggered by the issuance of a “proper invoice” which must be issued by all contractors and subcontractors at least every 31 days (subject to narrow exceptions).[4]Prompt Payment Act, s. 32.1(6). Within this 31-day limitation, the Regulations stipulate that the owner and contractor may agree to specific terms as to when a proper invoice may be delivered.[5]Prompt Payment Regulations, s. 3.
  • upon receipt of a proper invoice the owner must (i) dispute all or part of the proper invoice within 14 days, and (ii) pay all undisputed amounts in the proper invoice within 28 days.[6]Prompt Payment Act, ss. 32.2(1) and (2).
  • a contractor must pay its subcontractors within 35 days of issuing a proper invoice to the owner[7]Prompt Payment Act. S. 32.3(4). or within 7 days of receiving: payment from the owner or a notice of non-payment from the owner,[8]Prompt Payment Act s. 32.3(1). unless the contractor issues its own notice of non-payment to its subcontractor, or serves the owner’s notice of non-payment, together with an undertaking that the Contractor will commence an adjudication no later than 21 days from issuing the notice;[9]Prompt Payment Act, ss. 32.2(5) and (6).
  • the above payment deadlines and obligations apply down the construction pyramid, applying as between subcontractors and their sub-subcontractors.

The requirements for a “proper invoice” are set out in the PPCLA,[10]Prompt Payment Act, s. 32.1(1). whereas the Builders’ Lien Forms Amendment Regulation sets out the prescribed forms in which all notices described above must take.[11]Forms Regulations, Forms 1-14.

 

Adjudication Process

The PPCLA creates the statutory adjudication system, whereas the Regulations provide the details necessary to allow for the adjudication system to be put into place and become operational.

Unlike Ontario, the Regulations stipulate that Alberta may have multiple Nominating Authorities. Authorized Nominating Authorities will determine who will act as adjudicators by issuing a certificate of qualification to adjudicate to eligible individuals. Part 2 of the Regulations sets out eligibility requirements to become an adjudicator. The stipulated requirements include “10 years of relevant work experience in the construction sector” and “sufficient knowledge and experience” in areas including dispute resolution, contract law, adjudication process, ethics, and determination writing.[12]Prompt Payment Regulations, s. 7(2). The Regulations also require ANAs to create a code of conduct which authorized adjudicators must adhere to.[13]Prompt Payment Regulations, s. 10.

Further, the Regulations clarify the kinds of disputes that can be adjudicated and the rules surrounding same. With regards to the kinds of disputes that can be adjudicated, the Regulations list the following matters:

(a) the valuation of services or materials provided under the contract or subcontract;

(b) payment under the contract or subcontract;

(c) disputes that are the subject of a notice of non-payment under Part 3 of the Act;

(d) payment or non-payment of an amount retained as a major lien fund or minor lien fund and owed to a party during or at the end of a contract or subcontract, as the case may be; and

(e) any other matter in relation to the contract or subcontract, that the parties in dispute agree to, regardless of whether or not a proper invoice was issued or the claim is lienable.[14]Prompt Payment Regulations, s. 19.

As for the rules surrounding the adjudication, the Regulations set out the following timelines and procedures:

StepsDays from service of notice of adjudication
Deadline for parties to agree on adjudicator4
Deadline for Nominating Authority to appoint adjudicator 11
Deadline for claimant to provide its submission16 (or 5 days from appointment of adjudicator, whichever is earlier)
Deadline for respondent to provide its submission28 (or 12 days from receipt of claimant’s submission, whichever is earlier)
Deadline for adjudicator to issue order determining the dispute46 (or 30 days from receipt of claimant’s submission, whichever is earlier)

 

Progressive Release of Holdbacks

The PPCLA makes progressive releases of holdback mandatory for projects where:

  • the completion date is longer than one year, or the contract provides for payments of the holdback on a phased basis; and
  • the contract price exceeds the prescribed amount,[15]Prompt Payment Act, s. 24.1. which pursuant to the Regulations is $10,000,000.[16]Prompt Payment Regulations, s. 2(2).

As stipulated in the Regulations, where a contract does not specify a phased amount, the partial release of holdback payment must be made on an annual basis.[17]Prompt Payment Regulations, s. 2(1).

 

Extension of default period for Liens

The PPCLA extends, or otherwise alters, the limitation periods for filing a lien as follows:

  • for general construction, the limitation period is extended from 45 days to 60 days; and
  • for any improvement primarily relating to “the furnishing of concrete as a material” or “work done in relation to concrete” the limitation period is extended to 90 days.[18]Prompt Payment Act, s. 27(2.21). However, the Regulations state that the 90 day limitation period does not apply to entities that install or use “ready-mix concrete”, as defined in the North … Continue reading

The Regulations clarify that the 90 day lien period does not apply to “entities that install or use ready-mix concrete”,[19]Prompt Payment Regulations, s. 36. which is defined as the “mixing together water, cement, sand, gravel or crushed stone to make concrete, and delivering it to a purchaser in a plastic or unhardened state”[20]North American Industry Classification System (NAICS) Canada 2017 Version 2.0, Code 32732 – Ready-Mix concrete manufacturing. This clarification suggests that the 90 day lien period would apply to concrete suppliers, or those engaged purely in preparatory activities (such as base preparation or installation of rebar), but not to the subcontractors who actually place and finish the concrete.

 

Transition Period

Any contract or subcontract entered into after August 29, 2022, will be governed by the new rules under the PPCLA and the Regulations.[21]Prompt Payment Act, s. 74(2). However, any contract entered into prior to August 29, 2022, will continue to be governed by the rules under the previous statute for a period of two-years.[22]Prompt Payment Regulations, s. 37. After the expiration of the two years, all construction contracts in Alberta will be subject to the PPCLA and the Regulations, and the new rules contained therein. While this calculus is relatively straightforward for most contracts, parties who have entered into contracts where work is scheduled to take just short of two years should consider the potential implications of any unforeseen delays on whether or not the new rules will apply.

As a result of this transition period, for the next two and a half years there will be contracts that are governed by the new rules and some governed by the old rules. Businesses and participants in Alberta’s construction industry will need to be cognisant of which rules apply to which contracts, as lien rights, payment rights and obligations, and dispute mechanisms will be significantly impacted. To this end, parties should consider reviewing and updating their contracts and internal processes to ensure contractual payment terms are consistent with the PPCLA and the Regulations.

 

Conclusion

The Regulations much needed clarity and refinement to the PPCLA, with the most substantial clarifications provided in regards to the adjudication process. The changes ushered in by the PPCLA and the Regulations are substantial. These changes will radically alter how the Alberta construction industry functions, particularly with regards to how and when parties are paid and how disputes are settled.

With proclamation of the PPCLA and the Regulations, it is incredibly important to have competent counsel with a deep understanding of construction law and the prompt payment and adjudication regime to ensure your business is prepared to thrive in this new legislative environment. The lawyers at McCarthy Tétrault have extensive experience in the construction industry and can help you navigate this complex legislative scheme.

References

References
↑1 Prompt Payment and Construction Lien Act, c P-26.4 [Prompt Payment Act].
↑2 Builders’ Lien (Prompt Payment) Amendment Act, 2020, c 30; Proclaiming the Builders’ Lien (Prompt Payment) Amendment Act, 2020, OC 50/2022.
↑3 Prompt Payment and Adjudication Regulation, Alta Reg 23/2022 [Prompt Payment Regulations] and Prompt Payment and Construction Lien Forms Regulation, Alta Reg 22/2022. [Forms Regulations].
↑4 Prompt Payment Act, s. 32.1(6).
↑5 Prompt Payment Regulations, s. 3.
↑6 Prompt Payment Act, ss. 32.2(1) and (2).
↑7 Prompt Payment Act. S. 32.3(4).
↑8 Prompt Payment Act s. 32.3(1).
↑9 Prompt Payment Act, ss. 32.2(5) and (6).
↑10 Prompt Payment Act, s. 32.1(1).
↑11 Forms Regulations, Forms 1-14.
↑12 Prompt Payment Regulations, s. 7(2).
↑13 Prompt Payment Regulations, s. 10.
↑14 Prompt Payment Regulations, s. 19.
↑15 Prompt Payment Act, s. 24.1.
↑16 Prompt Payment Regulations, s. 2(2).
↑17 Prompt Payment Regulations, s. 2(1).
↑18 Prompt Payment Act, s. 27(2.21). However, the Regulations state that the 90 day limitation period does not apply to entities that install or use “ready-mix concrete”, as defined in the North American Industry Classification System.
↑19 Prompt Payment Regulations, s. 36.
↑20 North American Industry Classification System (NAICS) Canada 2017 Version 2.0, Code 32732 – Ready-Mix concrete manufacturing.
↑21 Prompt Payment Act, s. 74(2).
↑22 Prompt Payment Regulations, s. 37.

Do Section 23 Builders Lien Applications Exceed Masters’ Jurisdiction in BC? 2022 BCSC 287

The February 24, 2022 decision in Metro-Can Construction (PE) Ltd. v. Escobar[1]Metro-Can Construction (PE) Ltd. V. Escobar, 2022 BCSC 287. (“Metro-Can”) suggests that construction practitioners may wish to shift their practice for applications under s. 23 of the Builders Lien Act[2]Builders Lien Act, SBC 1997, c. 45. (the “BLA”) by bringing those applications before a justice rather than a master of the Supreme Court. In Metro-Can, after three days of argument, the master hearing the application held that s. 23 applications are not within a master’s jurisdiction and must be heard by a justice.

Sections 23 and 24 of the BLA both provide mechanisms through which liens can be removed from title, but with very different effect for owners. Section 23 applications, which are only permitted in relation to liens filed by claimants who are not engaged by an owner, permit owners to excise themselves from the lien enforcement proceedings. Pursuant to s. 23, the owner’s liability is discharged upon payment into court of funds equal to the maximum possible liability of the owner, usually the greater of the required statutory holdback or amount owing to the party through whom the liens are claimed.[3]Ibid, at s. 23. On the other hand, a s. 24 application permits liens to be cancelled upon payment of adequate security into court without any discharge or determination of liability.[4]Ibid, at s. 24.

While s. 23 applications routinely come before masters, although rarely give rise to reported decisions, the decision in Metro-Can holds that the relief sought under a s. 23 application is in the nature of a final order and beyond a master’s jurisdiction as set out in Practice Direction 50 (“PD-50”).[5]2022 BCSC 287 at paras. 3 and 4.

It is correct to characterize the nature of relief sought on a s. 23 application as a final order, but the authors question the holding that masters lack the jurisdiction to make such orders under PD-50. PD-50 has two distinct parts: (1) a direction of the Chief Justice under the Supreme Court Act as to matters on which a master is not to exercise discretion; and (2) non-exhaustive guidelines for the assistance of the profession and public as to matters on which a master has jurisdiction.[6]PD-50, summary.

Critically, under s. 11(7) of the Supreme Court Act, a master has, subject to constitutional limitations or a direction of the Chief Justice, the same jurisdiction under any enactment or the Rules of Court as a judge in chambers.[7]Supreme Court Act, RSBC 1996, c. 443, at s. 11(7).

The Chief Justice’s direction in PD-50 does not list final orders as a matter on which a master is not to exercise jurisdiction, nor are any of the specifically identified restrictions engaged by a s. 23 application.[8]PD-50 at para. 3. Therefore, on a s. 23 application, a master should have the same jurisdiction as a judge in chambers.

In the second part of PD-50 which outlines non-exhaustive guidelines, paragraph 5, entitled “Applications”, provides that, subject to a direction of the Chief Justice or constitutional limitation, a master has jurisdiction to hear applications under the Supreme Court Civil Rules.[9]PD-50 at para. 5.Interestingly, the analogous provision of the practice direction preceding PD-50 (PD-14 and PD-34) was entitled “Interlocutory Applications”, with the term “Interlocutory” being dropped from the heading to paragraph 5 in PD-50.

Paragraph 8 of the PD-50 guidelines lists specific types of final orders that, again subject to a direction of the Chief Justice or constitutional limitation, a master has jurisdiction to make.[10]PD-50 at para. 8.  While a s. 23 application is not specifically identified as a final order that masters have jurisdiction to make, paragraphs 5 through 9 of PD-50 are non-exhaustive guidelines that do not restrict a master’s jurisdiction but, as noted above, are for the assistance of the profession and public.

The authors are of the view that Metro-Can was wrongly decided and that s. 23 applications, whether brought by way of petition or application in an ongoing action, are within the jurisdiction of a master as articulated by PD-50 and are matters that should continue to be within the purview of masters. However, in light of Metro-Can and subject to a subsequent decision overturning or overruling it, practitioners may wish to shift their practice to bringing s. 23 applications before a justice. Doing so avoids the risk of bringing the matter, if not fully arguing the matter as was the case in Metro-Can, before a master who may ultimately decide that they lack jurisdiction and refer you for re-hearing before a justice.

 

References

References
↑1 Metro-Can Construction (PE) Ltd. V. Escobar, 2022 BCSC 287.
↑2 Builders Lien Act, SBC 1997, c. 45.
↑3 Ibid, at s. 23.
↑4 Ibid, at s. 24.
↑5 2022 BCSC 287 at paras. 3 and 4.
↑6 PD-50, summary.
↑7 Supreme Court Act, RSBC 1996, c. 443, at s. 11(7).
↑8 PD-50 at para. 3.
↑9 PD-50 at para. 5.
↑10 PD-50 at para. 8.

Maintenance Work, Repair Work, Capital Repair Work, and Lien Rights in Canada

Introduction

I often explain the difference between non-lienable maintenance and repair work on the one hand, and lienable construction work on the other, using the analogy of a landscaper called to a worksite. In one scenario he’s asked to mow the grass and trim the hedges. In another, he’s asked to terraform the entire property, complete with a new deck, sheds, a koi pond, and a stone pathway. The first scenario is non-lienable maintenance, while the second is lienable construction.

Not every worksite, however, involves a koi pond. When dealing with (for example) heavy industrial projects or the energy sector, repair and maintenance work might involve the comprehensive replacement of very large and very expensive machinery and equipment, or massive investment in capital repairs. The difference between maintenance, repair, and construction is often less clear, and courts frequently struggle with where to draw the line. To assist you, dear reader, in making this determination, we have reviewed and summarized the current state of the law in British Columbia,[1]Builders’ Lien Act, SBC 1997, c 45 (the “B.C. Act”). Alberta,[2]Builders’ Lien Act, RSA 2000, c B-7; as of July 1, 2021, Alberta’s Builders’ Lien Act has been replaced by the Prompt Payment and Construction Lien Act, Chapter P-26.4 (the … Continue reading Saskatchewan[3]Builders’ Lien Act, SS 1984-85-86, c B-7.1 (the “Saskatchewan Act”). and Ontario.[4]Construction Act, RSO 1990, c C 30 (the “Ontario Act”).

Executive Summary

The lines of authority respecting the division between maintenance work, repair work, and construction work in Canada have generally divided into two camps: (i) emphasis on the characterization, effect or intended effect of the work in Ontario case law, or (ii) emphasis on the characterization, effect or intended effect of the overall project in B.C., Alberta, and Saskatchewan.

In Ontario, the emphasis is on the nature of the work: maintenance or repair work intended to improve the value of the land is likely lienable (as such work is considered an “improvement” under the statute), whereas work that is intended merely to maintain the status quo is likely not lienable.

In B.C., Alberta, and Saskatchewan, the emphasis is on whether the work or service is necessary or supportive for the completion of the overall project, wherein the overall project is the improvement (and the overall project includes the physical construction of a thing). To put this in perspective, if the overall project is the construction of a shopping centre, then all work and services associated with that construction are lienable, including maintenance, cleaning, inspection, security, temporary water services, the delivery of porta-potties to the site, heating and hoarding, etc.

Legislative Comparison

In each of these jurisdictions, analysis begins with the definition of an “improvement”, because for work or services to be lienable, that work or service must be provided to an improvement. In B.C, Saskatchewan, and Ontario, an improvement includes “repair” or “capital repair” to land in question; Alberta hasn’t included the same terms within its definition of same.

(a)          British Columbia

While there’s limited case law in B.C. on the lienability of maintenance work, it’s clear – given the inclusion of “repair” work in the B.C. Builders Lien Act’s definition of improvement – that repair projects (likely capital repair projects) can constitute an “improvement” and therefore sustain lien rights. Given the currently available case law in B.C., it also appears that B.C.’s courts are mostly in harmony with the developing lines of authority in Alberta and Saskatchewan.

In the 2011 case of Alexander Construction Ltd. v Al-ZaibakEyeglasses,[5]Alexander Construction Ltd. v Al-ZaibakEyeglasses, 2011 BCSC 590, 2011 CarswellBC 2349 (“Alexander Construction”). the British Columbia Supreme Court needed to decide whether the lien claimant’s provision of basic inspection and maintenance work could be considered “work” within the meaning of section 1(5) of the B.C. Act, and therefore sustain lien rights that would have otherwise expired. The Court determined that while this work was “minimal”,[6]Alexander Construction at para. 66. given a liberal reading, it was still sufficient to constitute work on the larger improvement (the construction of a home). The Court noted that while the subject efforts “did not move the project any closer to conclusion, they prevented deterioration to the project that would further delay its completion.”[7]Alexander Construction at para. 66. In other words, the Court placed emphasis not on the nature or characterization of the work itself, but rather on the work’s connection to the larger overall improvement project.

In a similar line, in Shelly Morris Business Services Ltd. v Syncor Solutions Limited[8]Shelly Morris Business Services Ltd. v Syncor Solutions Limited, 2020 BCSC 2038 (“Shelly Morris”). the Supreme Court of British Columbia:

  1. noted that the definition of “improvement” is inclusive and can bear meanings other than those included in section 1 of the B.C. Act, as long as they do not subtract from the prescribed definition;[9]Shelly Morris at para. 24; quoting Boomars Plumbing & Heating Ltd. v Marogna Brothers Enterprises Ltd., 1998 CanLII 2970 (BCCA).
  2. emphasized that “improvement” means an improvement to the property itself; and
  3. held that the lien claimant must have contributed physically to the improvement of the site in question.[10]Shelly Morris at para. 30.

Both Alexander Construction and Shelly Morris are consistent with case law and statutory interpretation in Alberta and Saskatchewan, so the guidance from the jurisprudence in those provinces may be instructive for similar B.C. determinations.

(b)          Alberta

Alberta generally draws a much clearer line between physical construction of an improvement (which is lienable) and maintenance work (which is not) than jurisdictions such as Ontario. Given the absence of the terms “repair” and “capital repair” in the Alberta Act, Alberta courts have put more emphasis on the nature or characterization of the overall project rather than the effect or intended effect of the work in question.

Identification of the “improvement” in Alberta is determined by reference to the “overall project” and not the specific work being undertaken, so if nothing new is actually being physically constructed, there is likely not an improvement and thus likely no lien rights. On the other hand, if the overall project meets the definition of an improvement, then nearly any type of work or service provided to that larger project – and that is a necessary or supporting part of physical construction – will likely be lienable.

Fortunately, the Alberta Court of Queen’s Bench provided clear guidance on the specific circumstances in which maintenance will and will not be lienable in the 2021 case of Young EnergyServe Inc v LR Ltd,[11]LR Processing Partnership,Young EnergyServe Inc v LR Ltd, LR Processing Partnership, 2021 ABQB 101 (“Young EnergyServe”). where it dealt with the question of repair and maintenance work during a turnaround project at a gas processing plant.

In finding that a filed lien was not valid, the Court held that “the cleaning, repairing, and relining the interior of tanks and pressure vessels and replacing old or faulty piping and pressure valves are not directly related to the process of construction” and that “[t]hose activities are more appropriately characterized as being in the nature of maintenance.”[12]Young EnergyServe at para. 67.

First, the Court acknowledged that the recent approach taken in Alberta is to consider an “improvement” from the perspective of the “overall project”:

There is no evidence to suggest that the Turnaround Project was a component of a larger construction project on the Mazeppa Lands. In particular, there is no evidence: (i) that the overall project in this case was any broader than the Turnaround Project; or (ii) that the Turnaround Project was a component of the construction of the Mazeppa Power Plant.

I mention this point for context because the Alberta Courts considers “improvement” from the perspective of the “overall project” involved: Re Davidson Well Drilling Limited, 2016 ABQB 416 at para 79 [Davidson Well Drilling]. Based on the facts underlying this case, the Work under the Turnaround Project was not part of an overall project to build a structure on the Mazeppa Lands: see Trotter and Morton Building Technologies Inc v Stealth Acoustical & Emission Control Inc, 2017 ABQB 262 (Master Prowse) at paras 54, 55, and 58. […][13]Young EnergyServe at paras. 30, 31.

The Court noted that both the Supreme Court of Canada and the Alberta Court of Appeal have held that, in order to establish lien rights, a claimant must first strictly comply with the relevant statutory pre-requisites to the creation of the right. However, courts are then entitled to liberally interpret other matters dealt with in that statute. In this case, there was no evidence that the project in question was a component of the overall project to build a new structure on the lands.

Second, the Court reiterated and summarized the Alberta case law, which draws a clear distinction between work involved in the construction of an improvement versus subsequent maintenance, stating:

Alberta courts have determined that services must be directly related to the creation or construction of an improvement to entitle the provider to a lien under the Alberta BLA. As a result, the Courts in this province have, as a rule, rejected claims related to the maintenance and the remediation of lands.

The Alberta Court of Appeal has reinforced this interpretative approach by commenting that when assessing whether an applicant and the work it performs fall within the terms of the Alberta BLA, the proper approach is to give a strict interpretation to the relevant provisions: see Calgary Landscape at paras 13-19. That appellate Court was cited, and it stated that “[a]lthough it is clear that services need not be physically performed upon the improvement to fall with the meaning of the [Alberta BLA] they must […] be directly related to the process of construction”: Hett v Samoth Realty Projects Limited, 1977 ALTASCAD 120 (CanLII), 3 Alta LR (2d) 97 at para 25 (CA); see also Leduc Estates Ltd v IBI Group, 1992 CanLII 6104 (AB QB) at para 34.

In adopting this interpretation, the Alberta Court of Appeal confirmed that while services need not be physically performed for the improvement to fall within the meaning of the [Alberta Act], they must be directly related to the process of construction. As a result, the Alberta Courts have drawn a clear distinction between the work involved in the construction of an improvement as part of the construction process on a building site and the subsequent maintenance. As held in Calgary Landscape the former is “obviously related to ‘making or constructing’ while the latter, falling in the category of maintenance, clearly is not”: at para 12.[14]Young EnergyServe at paras. 44-46. [emphasis added]

Finally, the Court addressed jurisprudence under the Ontario and Saskatchewan Acts. With respect to the Ontario version, the Court noted that it would be inappropriate to rely on its definition of “improvement” because of a clear difference in the language between the Alberta and Ontario Acts; specifically, the use of the phrase “alternation, addition or repair” in the definition of “improvement” under the Ontario Act, which is absent in the Alberta Act. With respect to the Saskatchewan version, the Court referred to Re Davidson Well Drilling Limited,[15]Re Davidson Well Drilling Limited, 2016 ABQB 416. wherein Madam Justice J.M. Ross had previously acknowledged that the definition of “improvement” under the Saskatchewan Act is virtually identical to the Alberta Act. The Court ultimately used these factors to further distinguish the definition of “improvement” under the Ontario and Alberta Acts.

(c)          Ontario

In summary of what follows below, a party in Ontario may be entitled to lien rights where the work is intended to improve the value of the land (as in the case of “capital repair” work), but not in situations where the work is intended to maintain the status quo (i.e. non-lienable maintenance work). As such, the emphasis in Ontario case law appears to be on the effect or even the ‘intended effect’ of the work, rather than characterization of the larger “overall project” as there is, for example, in Alberta and Saskatchewan.

In 310 Waste Ltd. v Casboro Industries Ltd.,[16]310 Waste Ltd. v Casboro Industries Ltd., 2005 Carswell Ont 6441 (“310 Waste”). the Ontario Superior Court of Justice (Divisional Court) dealt with an appeal by a landowner from a judgement dismissing an application to discharge a lien associated with 310 Waste Ltd.’s removal of hundreds of thousands of tires from a dumpsite owned by Casboro Industries Ltd. Casboro, as landowner, retained 310, as contractor, when it was ordered by the Ministry of Environment to remove the tires from their dumpsite. When Casboro failed to pay amounts owing for the removal of the tires, 310 registered a lien against the associated lands.

On appeal, the Court agreed with the application judge’s rationale that maintenance (such as the removal of snow) did not give rise to a construction lien.[17]310 Waste at paras. 5, 6. However, the Court also agreed with the application judge’s conclusion that the removal of the tires, which were declared “waste” and a “contaminant” within the meaning of the Environmental Protection Act,[18]Environmental Protection Act, RSO 1990, c E. 19. “clearly enhanced the value of the land” and was therefore considered an “improvement” of the land as defined by the old Ontario Act, and held the lien filed by 310 to be valid.[19]310 Waste at paras. 7, 8. The rationale used in this decision is somewhat suspect given that merely “enhanc[ing] the value of land” without more (i.e. physical construction) has been rejected in many other contexts as an adequate justification to establish lien rights. Albeit, removing “contamination” through the use of physical labour likely does meet the established definition of construction.

Later, in U.S. Steel Canada Inc., Re,[20]U.S. Steel Canada Inc., Re, 2016 CarswellOnt 12275. (“U.S. Steel”) the Ontario Superior Court of Justice found that the following supply of goods and services could give rise to lien rights: (i) the adding of soil and the supply of flower plants; and (ii) spraying for weeds where the contractor provided its own material; and removing weeds, spreading dirt and gravel, and installing cloth. Further, the Court went so far as to suggest that “grounds keeping” would give rise to a lien right, although this conflicts with more strict interpretations from other jurisdictions.[21]Calgary Landscape Maintenance Ltd. v Khoury Real Estate Services Ltd., 1993 CarswellAlta 75, at paras. 11 and 12.

U.S. Steel created some uncertainty for owners and contractors alike, as landscape maintenance contractors in Ontario now had a valid claim that their services could be lienable. As a means to provide clarity, the Ontario legislature passed the Construction Lien Act Amendment Act,[22]Construction Lien Act Amendment Act, SO 2017, c 24 – Bill 142. on December 12, 2017. Subsequently, on July 1, 2018, changes to the definition of “improvement” came into effect under the new, renamed Ontario Act, which succeeded the old Ontario Act.

Where the old Ontario Act defined improvement to include “any alteration, addition or repair to the land”, the new Ontario Act specifies “capital repair” instead of “repair” to the land. These amendments were based on recommendations from an extensive report prepared by the Ontario government in 2016[23]Striking the Balance: Expert Review of Ontario’s Construction Lien Act: see https://www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/. which addressed the distinction between repairs and maintenance by making reference to the Income Tax Act.[24]Income Tax Act, RSC 1985, c.1 (5th Supp.). Specifically, the report indicated that while capital repairs are intended to improve the land, “maintenance” is intended to maintain the original condition of the land and is not intended to form part of an “improvement”, and therefore does not result in a lien right.[25]Sections 2.1.1 and 2.3 of Striking the Balance: Expert Review of Ontario’s Construction Lien Act. This distinction puts the emphasis in Ontario on the effect or intent of the work (i.e. improvement, addition, “value-add” etc.), whereas Alberta and Saskatchewan courts are more interested in the nature of the labour, and whether it’s best characterized as actual physical construction or mere maintenance.

(d)          Saskatchewan

The question of lienability of maintenance work has not been dealt with as directly in Saskatchewan as it has in Alberta and Ontario. As always, whether maintenance work is lienable will depend on whether such work contributes to the “improvement” of the lands in question.

In Crescent Point Energy Corp. v DFA Transport Ltd.,[26]Crescent Point Energy Corp. v DFA Transport Ltd., 2019 SKQB 189 (“Crescent Point v DFA”). the Saskatchewan Court of Queen’s Bench considered, among other things, whether service hauling of various fluids to or from well sites constituted an “improvement” under the Saskatchewan Act and could therefore result in valid lien rights. Crescent Point was an Alberta partnership carrying on business in Saskatchewan in the exploration, production, sales and marketing of petroleum, natural gas and related hydrocarbons. DFA Transport was a Saskatchewan transport company that supplied Crescent Point with various fluid hauling services.

When Crescent Point ceased payments, claiming overbilling, DFA Transport filed an action and application to compel Crescent Point to pay all outstanding amounts and notified Crescent Point of a Claim of Lien registered against their interests in Saskatchewan.

The parties agreed that DFA Transport’s work included:

  • Production hauling: transporting water or oil from well sites to processing facilities or disposal sites;
  • Service hauling: transporting water, kill fluid, and other liquids to or from well sites or battery sites in connection with maintenance and repairs to wells or batteries performed by third parties; and
  • Completion hauling: transporting water to well sites to fill frac storage tanks and transporting flowback liquid away from well sites.[27]Crescent Point v DFA at para. 11.

In determining the validity of any lien rights as a result of DFA Transport’s work for Crescent Point, the Court considered whether the work constituted an “improvement” within the meaning of the Saskatchewan Act. Specifically, the Court relied on its previous decision in Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of),[28]Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of), [1992] 3 WWR 152 (Sask QB). which held that if a person provides a service which has a direct and real contribution to the construction of an improvement, that person will be entitled to make a lien claim.[29]Crescent Point v DFA at para. 19.

The Court also referred to Boomer Transport Ltd. v Prevail Energy Canada Ltd.,[30]Boomer Transport Ltd. v Prevail Energy Canada Ltd., 2014 SKQB 368. where it had previously held that services that included, inter alia, the pumping out and hauling of water on a continuous basis, where that water was required to be extracted from an oil-water mixture being pumped from the ground through an oil well head, were an integral part of the production of oil for market and thus met the definition of a lienable claim.

Given the foregoing, the Court ultimately held that DFA Transport’s Claim of Lien was valid because, by servicing Crescent Point’s well sites and transporting fluids to and from the well sites, such services were an “improvement” under the Saskatchewan Act.[31]Crescent Point v DFA at para. 26.

Post Script

Posts on this website take many forms, from brief blog posts to deep-dive features which eventually form the foundation for updates to one or more of my books. This post is, obviously, of the latter variety. If you want (even more) up-to-date analysis on this topic and others, I suggest subscribing to (or purchasing a physical copy of) Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition.

References

References
↑1 Builders’ Lien Act, SBC 1997, c 45 (the “B.C. Act”).
↑2 Builders’ Lien Act, RSA 2000, c B-7; as of July 1, 2021, Alberta’s Builders’ Lien Act has been replaced by the Prompt Payment and Construction Lien Act, Chapter P-26.4 (the “Alberta Act”).
↑3 Builders’ Lien Act, SS 1984-85-86, c B-7.1 (the “Saskatchewan Act”).
↑4 Construction Act, RSO 1990, c C 30 (the “Ontario Act”).
↑5 Alexander Construction Ltd. v Al-ZaibakEyeglasses, 2011 BCSC 590, 2011 CarswellBC 2349 (“Alexander Construction”).
↑6 Alexander Construction at para. 66.
↑7 Alexander Construction at para. 66.
↑8 Shelly Morris Business Services Ltd. v Syncor Solutions Limited, 2020 BCSC 2038 (“Shelly Morris”).
↑9 Shelly Morris at para. 24; quoting Boomars Plumbing & Heating Ltd. v Marogna Brothers Enterprises Ltd., 1998 CanLII 2970 (BCCA).
↑10 Shelly Morris at para. 30.
↑11 LR Processing Partnership,Young EnergyServe Inc v LR Ltd, LR Processing Partnership, 2021 ABQB 101 (“Young EnergyServe”).
↑12 Young EnergyServe at para. 67.
↑13 Young EnergyServe at paras. 30, 31.
↑14 Young EnergyServe at paras. 44-46.
↑15 Re Davidson Well Drilling Limited, 2016 ABQB 416.
↑16 310 Waste Ltd. v Casboro Industries Ltd., 2005 Carswell Ont 6441 (“310 Waste”).
↑17 310 Waste at paras. 5, 6.
↑18 Environmental Protection Act, RSO 1990, c E. 19.
↑19 310 Waste at paras. 7, 8.
↑20 U.S. Steel Canada Inc., Re, 2016 CarswellOnt 12275. (“U.S. Steel”)
↑21 Calgary Landscape Maintenance Ltd. v Khoury Real Estate Services Ltd., 1993 CarswellAlta 75, at paras. 11 and 12.
↑22 Construction Lien Act Amendment Act, SO 2017, c 24 – Bill 142.
↑23 Striking the Balance: Expert Review of Ontario’s Construction Lien Act: see https://www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/.
↑24 Income Tax Act, RSC 1985, c.1 (5th Supp.).
↑25 Sections 2.1.1 and 2.3 of Striking the Balance: Expert Review of Ontario’s Construction Lien Act.
↑26 Crescent Point Energy Corp. v DFA Transport Ltd., 2019 SKQB 189 (“Crescent Point v DFA”).
↑27 Crescent Point v DFA at para. 11.
↑28 Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of), [1992] 3 WWR 152 (Sask QB).
↑29 Crescent Point v DFA at para. 19.
↑30 Boomer Transport Ltd. v Prevail Energy Canada Ltd., 2014 SKQB 368.
↑31 Crescent Point v DFA at para. 26.

Saving Paper Could Cost You – Potential Perils of Incorporating Terms by Reference: Razar Contracting Services Ltd v. Evoqua Water

Why this decision matters

Commercial agreements frequently incorporate or make reference to separate documents that form part of the larger bargain. This practice is known as “incorporation by reference”, and in the construction industry often involves the incorporation of language from prime or “head” contracts into subcontracts. In Razar Contracting Services Ltd. v Evoqua Water (“Razar Contracting”),[1] Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69.  the Manitoba Court of Queen’s Bench dealt with such language and refused to give effect to an arbitration clause located on the Defendant’s website, which the Defendant referenced in the purchase order it issued. Razar Contracting tells a cautionary tale about attempting to incorporate standard terms and conditions into a transaction merely by referencing where those terms can be found.

While the Court in Razar Contracting was more detailed in its dealing with the specific issues of jurisdiction to determine the existence of the alleged arbitration clause and the interpretation of same, the focus of this article is on the larger application of the Court’s findings regarding incorporation by reference.

In a world where contracts are increasingly negotiated, transmitted and executed electronically, businesses who rely on incorporating terms and conditions to their transactions without specifically including the terms themselves in the exchanges with the counterparty will want to consider what steps they can take to ensure that they can demonstrate their terms and conditions (i) have been brought to the other party’s attention; and (ii) were knowingly accepted.

Key Facts

Razar Contracting involved a dispute between a contractor, Evoqua Water Technologies Canada Ltd. (“Evoqua”), and a mechanical subcontractor, Razar Contracting Services Ltd. (“Razar”). The contractual relationship between the parties was formed after Razar responded to a bid package issued by Evoqua which included a form of subcontract with certain conditions. When Razar was awarded the contract, Evoqua simply issued a purchase order that stated that the terms and conditions of purchase that was located on its website applied to the purchase order unless otherwise agreed to in writing; Evoqua also provided a link to the website.[2]Ibid, at para. 6.

Razar’s president attested that he attempted, without success, to access the website. He made no further attempts, believing the form of subcontract in the bid documents would be executed.  However, that did not come to pass.[3]Ibid, at para 7.

Razar commenced an Action at the Manitoba Court of Queen’s Bench regarding unpaid invoices and claims for delay and impact costs. Evoqua brought an application to stay Razar’s Action, arguing that the terms and conditions on its website contained an arbitration clause which required all disputes between the parties to be resolved by an arbitral tribunal seated in Pittsburgh, PA, administered by JAMS.

The Court’s Analysis

The Application was formally brought pursuant to Article 8 of the Model Law On International Commercial Arbitration (“Model Law”),[4]The Model Law is in force in Manitoba pursuant to the International Commercial Arbitration Act, C.C.S.M. c. C151 (“ICAA“). Interestingly, the Court noted that both parties’ written … Continue reading which provides that on an application by a party, the court “shall” refer the parties to arbitration “unless it finds that the agreement is null and void, inoperative or incapable of being performed”.

The Court was asked to consider two main issues, which for the purpose of this article are addressed in reverse: (1) whether there was a valid and binding arbitration agreement, and (2) whether the Court had jurisdiction to rule on the validity or effectiveness of the arbitration agreement.[5]Ibid, at para. 13.

Issue 1 – Is There a Valid and Binding Arbitration Agreement?

Having taken jurisdiction of the matter for the reasons detailed further below, Kroft J. applied a balance of probabilities standard and found that no arbitration agreement was formed in the circumstances either for the purposes of the Model Law (which requires arbitration agreements to be in writing)[6]Model Law Article 7(2). or at common law.

In assessing whether an arbitration agreement was formed for the purposes of the Model Law, Kroft J. noted that under Article 7(2) of the Model Law, an agreement in writing could be found, among other ways, in acknowledgements in pleadings, or in “an exchange” of telecommunications that provide a record of the agreement.[7]Model Law Article 7(2). Kroft J. dismissed the argument that defining the purchase orders as the “Agreement” in the Statement of Claim signified Razar’s agreement to the terms and conditions on Evoqua’s website.

Examining the evidence concerning the formation of the agreement between the parties, Kroft J. noted that there was no “exchange” of communication between the parties where they both acknowledged and agreed to the arbitration clause, and held that such an exchange was required by the plain language of Article 7(2) of the Model Law to form an arbitration agreement.

Additionally, Kroft J. applied common law contractual formation principles and held that there was no meeting of the minds regarding the agreement to arbitrate. In so doing, Kroft J. took a high level view of the facts and circumstances surrounding the formation of the contractual relationship. Kroft J. noted that Evoqua was seeking to impose the terms outlined on its website, despite the fact that the bid documents had in fact contemplated an attached subcontract agreement with its own special conditions.[8]Ibid. Further, Kroft J. was persuaded that at the time of bidding, the president of Razar had not seen the terms and conditions that Evoqua sought to enforce, nor did the Court find evidence that Evoqua had taken adequate steps to draw those terms and conditions to Razar’s specific attention.[9]Ibid.

Having found no binding arbitration agreement, Evoqua’s application for a stay of the action in favour of arbitration was denied.

Issue 2 – Does the Court Have Jurisdiction in the First Instance?

Citing the seminal Supreme Court of Canada decision of Dell Computer Corp. v. Union des consommateurs[10]Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34. [“Dell”], Evoqua had argued that the Manitoba Court did not have the jurisdiction to rule on the existence or validity of the arbitration agreement, as that jurisdiction lay with the arbitral tribunal in the first instance. Dell confirmed the applicability of the competence-competence principle in Canada (the arbitrator has the competence to rule on its own competence)[11]Stated differently, the jurisdiction to determine the scope of its own jurisdiction. and further established the “general rule” that challenges to an arbitrator’s jurisdiction “must be resolved first by the arbitrator”, subject to questions of law or questions of mixed fact and law that require only superficial consideration of the evidence.[12]Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 at paras 84-86.

Razar sought to distinguish Dell, relying on a 2009 British Columbia Supreme Court case, H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc.[13]H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc., 2009 BCSC 1389. [“H & H Marine”], which suggested that Dell was limited in application to arbitration issues arising under the Civil Code of Québec, and that the applicant needs to tender an evidentiary or statutory basis for the application of the competence-competence principle.

Justice Kroft relied on H & H Marine, and found that Evoqua had failed to tender evidence pertaining to the JAMS arbitration rules to establish the competence-competence principle would apply to the arbitral tribunal in Pittsburgh, PA. Justice Kroft also noted that in the event Dell applied, this case fell within the exceptions articulated in Dell, as the facts were not in dispute and the question before the Court required a legal conclusion, not material findings of fact. As such, Kroft J. found that the Court had the jurisdiction to consider whether there was an arbitration agreement and that the Court ought to exercise that jurisdiction.

Commentary

Regarding the interpretation of the contract generally, the Court’s consideration of whether the terms incorporated by reference actually formed part of the agreement stands as an interesting 21st century twist on the so-called “battle of the forms”.[14]See Butler Machine Tool Co Ltd. v Ex-Cell-O Corp (England) Ltd. [1977] EWCA Civ 9. What is consistent with this long line of authority is the underlying question of whether the terms and conditions have been specifically drawn to the attention of the seller.

Razar Contracting stands as an example of the difficulty a party may have establishing that such attention has been ensured when the terms and conditions are located outside of the main agreement and indeed may not have even been reduced to paper. While not explicitly referenced in Kroft J.’s decision, Razar Contracting is in keeping with the general trend that an arbitration clause in one contract is only incorporated into another contract if that clause is clearly and specifically referenced. In this way, some courts appear to have applied a more stringent level of scrutiny where the proposed term is an arbitration clause in particular. For example, in Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc.,[15]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) Chapnik J. held that “[i]ncorporation of an arbitration clause can only be accomplished by distinct and specific words …”,[16]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 11 [emphasis added].ultimately finding that “the manifest intention of the parties, as reflected on the face of the subcontract document, was not to include the arbitration clause therein; in the alternative, the matter was overlooked and cannot now be imposed upon the parties in the absence of agreement between them.”[17]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 15. Similarly, in Sunny Corner Enterprises Inc. v. Dustex Corp.,[18]Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172. Kennedy C.J.S.C. held that a “general incorporation of the prime contract into the subcontract will not normally include the arbitration clause.”[19]Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172 at para. 39 [emphasis added]. See also Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition at § 4:23. Incorporation … Continue reading While Kroft J. perhaps does not go as far, he nonetheless held “that the reference in Evoqua’s purchase order to a website showing multiple categories of terms and conditions with no real guidance does not amount to a written arbitration agreement […]”.[20]Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69 at para. 33.

More broadly, the British Columbia Supreme Court provided a valuable summary of the notice and accessibility considerations regarding the incorporation of terms and conditions through an external website in its decision in Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd.:[21]Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224.

In an appropriate case it might be that parties, especially sophisticated commercial actors, would be taken to know that terms and conditions are found on a website. It is now commonplace for companies to have internet websites which allow for electronic transactions. However, in order for terms and conditions on an internet website to be within the common understanding of the parties and part of their contract, there should be some evidence that those parties had interacted through the use of their websites, not just by email, or at least had notice of the terms and conditions on the other’s website at the time of entry into contract. There must also be evidence that those terms and conditions were posted on the website at the requisite time. It would be inappropriate to simply imply notice of terms absent any evidence that the website had been used before or that reasonable steps were taken to bring the existence of that website, and specifically the terms and conditions contained therein, to the attention of the other party prior to the contract.[22]Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224 at para. 124. See also Centre intégré universitaire de santé et de services sociaux du … Continue reading

Finally, with respect to the alleged arbitration process, the Court’s conclusion that the general rule of systemic referral to arbitration articulated in Dell need not apply in the circumstances is surprising, both legally and on the facts of the case. Dell has been followed by courts across common law Canada numerous times, including in Manitoba.[23]See for instance, Uber Technologies Inc. v Heller, 2020 SCC 16 where the Supreme Court of Canada confirmed that the framework from Dell Computer Corp. applies in Ontario based on the “similarities … Continue reading Also surprising is the Court’s decision not to address Article 16 of the Model law in the decision, as this provides for the application of the competence-competence principle for a tribunal subject to the Model Law.[24]On account of conflicts of laws principles, foreign law is to be assumed to be the same as the law of the forum unless specifically pled and proven otherwise: Old North State Brewing Co v Newlands … Continue reading Instead, the Court opted to recognize its discretionary jurisdiction afforded by Dell.

References

References
↑1 Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69.
↑2 Ibid, at para. 6.
↑3 Ibid, at para 7.
↑4 The Model Law is in force in Manitoba pursuant to the International Commercial Arbitration Act, C.C.S.M. c. C151 (“ICAA“). Interestingly, the Court noted that both parties’ written submissions were premised on the domestic Arbitration Act, CCSM c A120, applying. The application of the ICAA was only addressed in oral argument where both parties acknowledged that the ICAA applied.
↑5 Ibid, at para. 13.
↑6 Model Law Article 7(2).
↑7 Model Law Article 7(2).
↑8 Ibid.
↑9 Ibid.
↑10 Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34.
↑11 Stated differently, the jurisdiction to determine the scope of its own jurisdiction.
↑12 Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 at paras 84-86.
↑13 H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc., 2009 BCSC 1389.
↑14 See Butler Machine Tool Co Ltd. v Ex-Cell-O Corp (England) Ltd. [1977] EWCA Civ 9.
↑15 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.)
↑16 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 11 [emphasis added].
↑17 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 15.
↑18 Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172.
↑19 Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172 at para. 39 [emphasis added]. See also Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition at § 4:23. Incorporation by Reference, which notes that in the United Kingdom, this rule is sometimes referred to as the “rule in Aughton” after the decision in Aughton Ltd. (formerly Aughton Group Ltd.) v. M.F. Kent Services Ltd. (1991), 57 B.L.R. 1, 31 Con. L.R. 60 (Eng. C.A.).
↑20 Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69 at para. 33.
↑21 Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224.
↑22 Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224 at para. 124. See also Centre intégré universitaire de santé et de services sociaux du Centre-Sud-de-l’Île-de-Montréal c. Oracle Canada, 2017 QCCS 6377 at para. 75, where Peacock J.S.C. commented on specific notice and accessibility issues and held: “Here, the Plaintiff could not find the external document by simply visiting www.oracle.com/contracts. The title of the document on the website was not the same as the one provided in the purchase order, a series of steps were required to reach the document, and the French version was only accessible if the English title happened to be found.”
↑23 See for instance, Uber Technologies Inc. v Heller, 2020 SCC 16 where the Supreme Court of Canada confirmed that the framework from Dell Computer Corp. applies in Ontario based on the “similarities between the arbitration regimes in Ontario, British Columbia and Quebec.” (at para 35). See also Wardrop v Ericsson Canada Inc., 2021 MBQB 183, and Buffalo Point Development Corp. Ltd. v. Alexander et al, 2012 MBQB 341.
↑24 On account of conflicts of laws principles, foreign law is to be assumed to be the same as the law of the forum unless specifically pled and proven otherwise: Old North State Brewing Co v Newlands Services Inc. (1998) 58 BCLR (3d) 144 at 154.

Alberta Court Applies Principles Of Contract Interpretation And Limitations To A Client-Consultant Contract

In the recently released decision in Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11, the Alberta Court of Queen’s Bench applied three potential aids to the interpretation to a client-consultant contract: contra proferentem; post-contract conduct; and estoppel. The court also applied the limitation period to a claim for a percentage-based fee.

The Interpretation and Limitations Issues

After the project was finished, the architects asserted that, on a proper interpretation of the client-consultant agreement, the fee should have been paid on a percentage basis, not a fixed fee basis. The architect relied upon the principle of contractual interpretation known as contra proferentem since the client (the University) had prepared the six drafts of the agreement. The owner asserted that the fee was a fixed fee, and also said that the contract should be interpreted in light of the parties’ actual performance of the contract and that the consultant was estopped from asserting that the fee was based on a percentage of the cost of construction.

The owner also asserted that the consultant’s claim was barred by the limitation period since more than two years had expired from the time when, if the consultant was correct, the fee would have amounted to more than the consultant was paid under the contract and the consultant knew or should have known that the owner was in breach of the contract.

Contra Proferentem

The Alberta court held that there was very little, if any, place for the application of the contra proferentem rule in the present circumstances:

“Where an ambiguity arises in respect of a matter that has been specifically flagged for future negotiation between two sophisticated parties, it should be resolved through the usual principles of contractual interpretation. This includes have regard to the factual matrix and, in some limited circumstances, post-contract conduct that might assist in determining the objective of the parties. The doctrine of contra proferentem has very limited utility or application in that analysis.”

Post-contractual conduct

During the performance of the contract, the parties proceeded on the basis that the fee was a fixed fee, not a percentage fee, but that the consultant was entitled to extra payment for work done in relation to change orders. The Alberta Court held that, in interpreting the contract, it was proper to look at this post-contractual in arriving at the proper interpretation of the contract, particularly when the conduct was consistently and unambiguously in favour of one interpretation:

“…..Such post-contract conduct is not properly considered as part of the factual matrix bearing on the intention of the parties at the time the contract was entered into. It may be considered, however, in the resolution of ambiguity in the contractual language used: Shewchuk v Blackmount Capital Inc., 2016 ONCA 9123 at 41….A cautionary approach is required where evidence of such subsequent conduct is used for the purpose of divining intention. It must generally be given limited weight, but “will have greater weight if it is unequivocal in the sense of being consistent with only one of the two alternative interpretations that generated the ambiguity triggering its admissibility”: Shewchuk at para 54. In this case, the language used in each of the six Change Orders signed by the parties during the project is both consistent and unequivocal in treating the work done by RKA as being part of the basic services. The language is also consistent with being compensated through adjustments to the “Fee for Service” under Section 1 of Schedule C to the Service Agreement.” (underlining added)

Estoppel

For the same reason, the Alberta court held that, by conducting itself throughout the project on the basis that the fee was payable on a fixed basis, the consultant was now estopped from asserting the contrary:

“…..it is reasonable to infer from the evidence that, had RKA refused to approve and sign-off on the Change Orders as worded, there would have been, at minimum, a discussion and negotiation of how RKA should be compensated, having regard for the wording of Article 4.3.2 and the fee negotiation contemplated in respect of fees for “Additional Services.” By RKA acquiescing in the Change Order process as implemented, only to assert its entitlement to additional fees well after conclusion of the project, the University was deprived of that negotiation (or termination) opportunity to its detriment…… Accordingly, had I accepted the position of RKA regarding the proper interpretation of the Service Agreement, I would have nonetheless found them to be estopped from claiming damages for breach of the Service Agreement.”

The Limitation Period

The Alberta Court held that the consultant’s claim was barred by the Alberta two year limitation period. If the consultant was correct that the contract provided for a fee based on a percentage of the cost of construction, then during the course of the project it would have been apparent to the consultant that the cost of construction had much exceeded the projected cost and that the consultant was owed a much higher fee than was being paid to it. More than two years passed from that point in time before the consultant made its claim.

The consultant asserted that the fee was not truly payable until its legal entitlement to percentage-based compensation was known, which it asserted was not known until the building was complete and the construction costs were known with certainty.

The Alberta court accepted the owner’s submissions:

“The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed. It is also clear that RKA was being paid for ongoing work, excluding the separately negotiated FFE Agreement, pursuant to a series of Change Orders purporting to contain add-ons to the basic services fee described in Section 1 of Schedule C…..Accordingly, the essential facts supporting a breach of contract under RKA’s interpretation of the Service Agreement were probably known as early as March 23, 2009. These facts were certainly known when the post-project reconciliation of amounts paid to RKA, as against amounts owing under the contract, was done in March 2010. Accordingly, if RKA is correct in its interpretation of the Service Agreement, and is not estopped from claiming a breach, it would nonetheless have been out of time pursuant to the Limitations Act.”

The Merits Of The Claim

The court reviewed what it described as the “poorly drafted” and “confusing and ambiguous language” of the contract. Thus, the RFP for the contract stated that the “fees will be based as a percentage (%) of the total construction budget” and the heading to Article 4.3 of the contract stated that the fee was a “Percentage-Based Fee”. However, article 4.3.2 stated: “For greater certainty, the Fee for Services as set out in Schedule C is a fixed fee, and there will be no adjustments to the fee in the event of changes in Construction Cost due to inflation. The fee will only be adjusted in the event and in accordance with an approved Change Order which changes the Scope of Work and results in an upward adjustment in the Construction Cost or Contract Time.” Schedule C to the contract stated: “(a) Fixed Base Fee…”

After sifting through all this inconsistent language, the Alberta court held that the contract provided for a fixed fee, not a percentage fee based upon the cost of construction. The court also held that the consultant was entitled to extra fees in relation to work done on the change orders:

“Article 4.3.2 shows that the parties intended that the fee for services be a fixed fee….. Although poorly drafted, Article 4.3.2 also shows that, on an objective basis, the parties intended that compensation for basic services in respect of changes to the scope of work being done, as opposed to “Additional Services,” are to be governed by Article 4.3 and the corresponding provisions of Schedule C…..The language used by the parties in Article 4.3.2 allows the University to exercise a measure of cost control by reviewing and approving Change Orders, and to adjust the base fee for services through the Change Order process. Section 1.3(a) of Schedule D of the Service Agreement includes, as “Additional Services,” revising or providing additional drawings, specifications, or other documents “caused by instructions inconsistent with instructions or written approvals previously given by the owners, including revisions made necessary by adjustments in the Owner’s program or Project Budget….The better view, however, is that the inclusion of services associated with a scope of work change in Article 4.3.2 was intended to bring them within the ambit of services compensable through adjustment to the fixed base fee as set out in Section 1 of Schedule C.”

Accordingly, the court dismissed the consultant’s claim for further fees based on a percentage of the cost of construction.

Discussion

It is not often that one construction law case deals with a number of contract interpretation principles and the limitation period. This decision will be a useful guide to those principles for application in similar circumstances.

The court was strongly influenced by the fact that, throughout the project, the consultant participated in the calculation and payment of the fee on a fixed fee basis, and did not suggest, until the project was well over, that the fee should have been paid on a percentage basis. Clearly there is a lesson for consultants here: be up front about the basis for the fee, and don’t try to assert a different basis after the fact.

The court’s conclusion on the limitations issue might be contentious. Under section 3(1) of the Alberta Limitation Acts, the limitation period starts to run when the claimant knew or ought to have known that: (i) injury for which the claimant seeks a remedial order had occurred, (ii) that the injury was attributable to conduct of the defendant, and that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding.

Accordingly, the limitation period only commences when the cause of action arises and (not or) the claimant knows or ought to know that it has a claim. In other words, the fact that the claimant knows or ought to know that the defendant’s conduct amounts to a breach of contract, and that the claimant will have a claim, does not start the limitation period unless the time for the obligation to be performed has arrived and an accrued cause of action exists (unless the claimant treats the defendant’s conduct as an anticipatory breach of contract and terminates the contract forthwith).

If the fee in this case was payable by installments, and each instalment was itself legally due and payable during the project at the stipulated time or event, then the limitation period for each payment then arose. But if, on the proper construction of the contract, the fee was one fee only earned on the completion of the project, although payable during the project by way of part-payments, then the limitation period would only arise when the fee was fully earned. And even in the first case, the limitation period would only expire payment by payment, and would not expire for those payments payable less than two years before the action was commenced.

The Alberta court did not discuss when the cause of action for the fee payments arose. In its view, the essential question was: “when the facts giving rise to the claimed breach were known or discoverable.” It further stated: “The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed.” It appears to have assumed that the obligation to pay had by then arisen. If that assumption is correct, then the court’s conclusion is correct. If the obligation to pay had not yet arisen, even though the clamant had submitted interim bills, then the court’s conclusion may not be correct. In addition, if any of the client’s payment obligations fell within two years of the commencement of the action, then the action may have been timely with respect to those payment obligations.

All of which is to say that the parties to a building contract that take a long time to perform should be careful about limitation periods that may arise during the contract. A building contracts is usually considered to be “entire”, “dependent” or “whole” contract, under which the obligations are not independent but dependent on one another, and not fulfilled until entirely fulfilled. However, the part payment obligations under a building contract are usually considered to be severable and presently enforceable as to each payment. This is how the Alberta court considered the payments under this consultant’s agreement. The issue may be disputable under another building or consultant’s contract.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, part 3(f), chapter 2, parts 2(3)(f), 2(4)(iii) and chapter 9, part 3(a).

Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11

Building Contracts – Interpretation – Estoppel – Contra proferentem – Post-contract conduct – Limitation periods

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                     January 29, 2018  

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

Alberta Court Rejects Assertion That The Mortgagee Was An “Owner” Under The Builder’s Lien Act

In Westpoint Capital Corp. v. Solomon Spruce Ridge Inc., 2017 CarswellAlta 580, 2017 ABQB 254, the Alberta Court of Queen’s Bench made a number of decisions relating to the priorities between lienholders and mortgagees.

The court found that a mortgagee was not an “owner” of the land within the Alberta Builder’s Lien Act. In any event, by not claiming in its lien and lien action that the mortgagee was an owner, the lien claimant could not assert a claim that the mortgagee was an owner.

The court also found that under the Alberta Act, the mortgage advances had priority over the lien claimant even though they exceeded the value of the land at the time that the first lien arose.

Background

The mortgagee W was controlled by V. V also controlled the prior owner of the lands who had sold them to the present registered owner S. S was controlled by G.

W “advanced” monies under its mortgage but $1 million of that advance went into a GIC in W’s name, as security for the mortgage loan and in particular for the completion of “deep services” on the land. In addition, about $600,000 of the mortgage advance went into a GIC in W’s name as security for a development agreement with the municipality.

S agreed to sell the land to B, and B claimed priority under its agreement of purchase and sale.

Contractor P registered a builder’s lien and commenced a lien action against S. It joined W to the action, not as an owner, but as a “nominal” defendant and encumbrancer.

In the subsequent court proceedings, both mortgagee W and buyer B made tenders to buy the property and B was the successful bidder.

Both contractor P and buyer B claimed that mortgagee W was an “owner” under the Alberta Builder’s Lien Act.

Decision

The court held that “[r]emedies against a mortgagee or landlord such as declaring them to be an owner under the Builder’s Lien Act are unusual and rare. Clear circumstances must exist for this extraordinary remedy to be imposed. In my view, those circumstances are absent here.”

The court relied upon the following factors in finding that the mortgagee W was not an owner:

  1. there was no information that W and V were not acting at arms-length to the owner S.;
  1. there was nothing sinister or suspicious about the dealings;
  1. while W advanced more money than the land was worth at the time the mortgage was advanced, $1.5 million was “advanced” to invest in GICs in W’s name as security for S’s obligations under the mortgage loan;
  1. most of the registered owner S’s creditors on the project were paid. Accordingly, there was no basis for a suggestion that the mortgagee W and the registered owner S colluded to harm contractors and subcontractors;
  1. there was no evidence of direct dealings between the mortgagee W and any of the contractors or subcontractors. W did not pay the contractors or subcontractors directly and had no involvement with the construction on the lands, other than to release monies from one of the GICs to the registered owner S after it was satisfied that certain work had been completed;
  1. there was no evidence that, at any time before S defaulted on the mortgage, the mortgagee W had any intention of having an interest in the lands other than as mortgagee.
  1. there is no evidence of any request, express or implied by the mortgagee W that any contractor do any work on the property.
  1. the fact that G, who controlled the registered owner S, worked for or with the mortgagee W after the mortgage default was not relevant. G “undoubtedly had an interest in working with a major creditor to minimize his risks.”

The court also found that the contractor P’s claim that the mortgagee W was an “owner” of the land failed due to its failure to file a lien against the estate of W as owner:

“Essentially, a builder’s lien has no value until it is registered. While registration may have some retroactive effects, as under s 11(1) referenced above, it does not attach any interest in the lands until it is registered. A builder’s lien claim against an owner who has not contracted directly with the claimant provides in rem remedies only, and does not make an owner personally liable to the claimant. It is the owner’s interest in the lands that is at stake, not the owner’s other assets….Here, any builder’s lien claim against [W] is well past the filing deadline. Not by a few days or weeks, but rather years. Despite not claiming a lien against [W] interest in the lands, [P] has made no attempt to amend the lien it did file to include a claim against [W].

The court held that the mortgagee had priority over the lienholder and purchaser even to the extent of advances made which exceeded the value of the land when they were made:

“No authority is cited for the proposition that advances beyond the value of the mortgaged lands are not entitled to the same priority as advances up to the value of the lands and buildings. That may be the case in jurisdictions where lien claimants have priority over mortgagees to the extent that the lien claimants have increased the value of the property since the last mortgage advance. That is not the law in Alberta.”

The court also held that the contractor P’s claim against the mortgagee W could not be corrected under the curative section, section 37 in the Alberta statute, because “[t]he court has no discretion to depart from statutory requirements.”

Discussion

This decision provides a good check-list for those factors which may be considered in determining whether a mortgagee – or landlord or other person – is an “owner” under the lien statute. Here, there were circumstances which on the surface might raise suspicions: the prior owner was controlled by the same person who controlled the mortgagee which sought to be the buyer in the ultimate court proceedings. Was the “man in the middle”, S, simply a stooge? The court went through an eight point check-list and found no evidence to that effect.

The decision is also a warning that, if an ownership claim is to be made against any person, then the lien must be filed against that person’s interest in the land and an action asserting such a claim must be made against that person. And if such a claim is not made, the curative section will be of no avail.

The court’s finding that the mortgage advances had priority over the lienholder even to the extent of the advances exceeding the value of the land is noteworthy. Section 11((4) of the Alberta Builder’s Lien Act says that a registered mortgage “has priority over a lien to the extent of the mortgage money in good faith secured or advanced in money prior to the registration of the statement of lien” and does not mention the value of the land at the time when the first lien arose. By contrast, section 78(3) of the Ontario Act says that a prior mortgage has priority over liens “to the extent of the lesser of, (a) the actual value of the premises at the time when the first lien arose” and the amount of the advances.

In this case, a large portion of the “advances” made by the mortgagee were effectively to itself and were put into GICs in its name which provided security for the mortgage and for performance of the builder’s obligation and obligations under the development agreement with the municipality. Were these payments truly “advances” under the mortgage so far as the lien statute is concerned?

The curative section in the Ontario lien statute is proposed to be widened by the Construction Lien Amendment Act, 2017, which has now received second reading. Under new subsection 6(2) of what will be known as the Construction Act, the “minor irregularities” that are not to invalidate a certificate, declaration or claim for lien are expanded. They will now include minor errors or irregularity in the name of the owner, or person from whom materials or services are provided, or the legal description of the premises, or in placing owner’s name in the wrong portion of a claim for lien. However, it seems unlikely that this expanded section will cure the failure in a lien to make a claim against a party as an owner, or to do so in the statement of claim.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 16, section 4(a)(iv), 4(d) and 4(l)(C).

Westpoint Capital Corp. v. Solomon Spruce Ridge Inc., 2017 CarswellAlta 580, 2017 ABQB 254

Building contracts – builder’s and construction liens – claim against mortgagee as owner – curative section

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                                 November 14, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

Payment Clause Held Not To Be A “Pay-When-Paid” Clause

In Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd., 2017 CarswellYukon 107, 2017 YKSC 51, the Yukon Supreme Court recently considered whether a payment clause in a construction contract was a pay-when-paid clause which entitled the contractor to only pay the subcontractor if and when it was paid by the owner.

The clause in question read as follows:

“Payments shall be made monthly on progress estimates as approved by the Contractor covering 90% of the value of the Work completed by the Subcontractor to the end of the previous month; such payments to be made 7 days after the Contractor receives payment for such Work from the Owner.” (underlining added)

The court considered the conflict in the law at the appellate level in Canada. In Timbro Developments Ltd. v. Grimsby Diesel Motors Inc., [1988] O.J. No. 448, the Ontario Court of Appeal held that the clause in question was a pay-when-paid clause, and that the contractor did not have to pay the subcontractor until paid by the owner. Justice Finlayson dissented, holding that the clause was a timing provision and “in no sense puts the subcontractors at risk that they will not be paid if the contractor is not paid. They are not co-adventurers or partners in this construction contract. Having done the work as found by the trial Judge, they are entitled to be paid.”

In Arnoldin Construction & Forms Ltd. v. Alta Surety Co., [1995] N.S.J. No. 43, the Nova Scotia Court of Appeal held that the clause in question was not a pay-when-paid clause which entirely protected the contractor from paying until paid by the owner. Rather, the clause was a payment timing clause which provided that payments by the contractor would generally be paid after payment from the owner but did not preclude the contractor form finally paying the subcontractor even if unpaid by the owner. In the Arnoldin case, the clause was being relied upon by the payment bonding company and that factor may have been important since it makes less sense to interpret the clause as entirely relieving the contractor from paying the subcontractor when the contractor has provided a payment bond to deal with that very situation.

In concluding that the clause was not a pay-when-paid clause, the Yukon Supreme Court said:

“I am in agreement with the interpretation in Arnoldin where the words in the contract before it which were not as clear and precise as the words in Timbro where the contractor clearly assumed the risk of non-payment by the owner to the contractor. In the case at bar, I am of the view that the payment clause is a timing clause rather than a “pay when paid” clause as in Timbro. There is no clear wording that the payment on the Subcontract was conditional on the owner paying the contractor. Therefore, I order that the balance outstanding shall be paid regardless of whether Martian has paid Seko, subject to amount only under the two remaining issues.”

Discussion

This decision follows the trend of recent cases. Most of the recent court decisions have held that, unless the language of the contract makes it very clear that the contractor does not have to pay the subcontractor at all if not paid by the owner, then the provision will not preclude the ultimate obligation of the contractor to pay the subcontractor.

It is difficult to distinguish Timbro from Arnoldin based upon the wording of the respective contracts. In Timbro the relevant wording was “when we have been paid by the owner”. In Arnoldin, the words were “after payment has been received by the Contractor.” The recent cases, following the Arnoldin and not the Timbro decision, may reflect a judicial antipathy to a clause which, in the absence of very clear words, denies payment to the subcontractor when, as Justice Finlayson said, it has done the work.

This decision high-lights the importance of the Prompt Payment regime proposed to be introduced into Ontario law by the Construction Lien Amendment Act, 2017. Under that legislation, a contractor is entitled to deliver to a subcontractor a notice of non-payment, and may deliver such a notice if it has not been paid by the owner. The same regime applies down the payment pyramid.

This legislation may arguably introduce into Ontario a statutory pay-when paid regime. That would be a surprising result since the general trend is for legislatures to ban pay-when paid (as has occured in the U.K. and in several U.S. states) and for courts to strain against finding that a clause is a pay-when-paid clause unless that is very clear.

Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd., 2017 CarswellYukon 107, 2017 YKSC 51

Building Contracts – pay-when-paid clauses – Prompt Payment legislation

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                         October 27, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Amendments To The Ontario Construction Lien Act Have Been Given First Reading (Part 1)

On May 31, 2017, the Ontario Legislature gave first reading to Bill 142, which will enact the Construction Lien Amendment Act, 2017. By this legislation, substantial amendments are proposed to the Ontario Construction Lien Act, including the change of the name of the Act to the Construction Act.

The text of Bill 142 may be found by googling Bill 142, Construction Lien Amendment Act, 2017.

This proposed legislation (the Proposed Act) follows a lengthy Report: Striking the Balance: Expert Review of Ontario’s Construction Lien Act, delivered April 30, 2016 (the Report). The Report recommended the changes to Ontario’s Construction Lien Act (the Existing Act) that are now contained in the Proposed Act, so the contents of the Report should be consulted in interpreting and understanding the Proposed Act. The Report is reviewed in my article dated May 1, 2017. The text of the Report may be found by googling Amendments to the Construction Lien Act/Striking the Balance-Expert Review of Ontario’s Construction Lien Act.

The proposed changes to the Existing Act are so numerous that they will be dealt with me in two articles. This is the first article. These articles do not address all the proposed changes to the Existing Act, only those that I consider to be interesting or important.

The changes will be dealt with largely in the order in which they appear in the Proposed Act. I will offer my Comments and Questions about the various sections in the Proposed Act.

Joint Ventures 

The definition of “contractor” in subsection 2(1) is amended to include a “joint venture entered into for the purpose of an improvement or improvements”.

Written Notice of Lien

The definition of “written notice of lien” in subsection 2(1) is changed to read “a claim for lien or a written notice of a lien in the prescribed form, given by a person having a lien.”

New subsection 87(1.1) provides that “a written notice of lien shall be served in a manner permitted under the rules of court for service of an originating process.”

Comments and Questions

These amendments are important. They do away with the prior informality of the form and the manner of service of a notice of lien. Now, the notice of lien must be in a prescribed form and must be served in the same manner as an originating proceeding in court.

Improvements involving “repairs” limited to capital repairs

The definition of “improvement” in subsection 1(1) is amended to include the word “capital” before the word “repairs”. In the result, only capital, and not operating, repairs are included within the word “improvement”.

This point is emphasized in new subsection 1(1.1), which further defines the word “improvement” as follows:

            “Capital repair”

(1.1) For the purposes of clause (a) of the definition of “improvement” in subsection (1), a capital repair to land is any repair intended to extend the normal economic life of the land or of any building, structure or works on the land, or to improve the value or productivity of the land, building, structure or works, but does not include maintenance work performed in order to prevent the normal deterioration of the land, building, structure or works or to maintain the land, building, structure or works in a normal, functional state.” (underlining added)

Comments and Questions

The new legislation clearly re-draws the line around “repairs” to only include “capital” repairs. The debate will continue, however, but it will now be a debate about what is included in the definition of “capital repairs”, and whether the material or services fall within the words “extend the normal economic life” or “improve the value or productivity” on the one hand, or the words “prevent normal deterioration” or to “maintain” the building etc. in a “normal, functional state”, on the other hand.

The Report states that its approach to “capital” repairs and “maintenance” reflects the approach taken in the Income Tax Act. Accordingly, income tax cases may be of some assistance in interpreting this portion of the Proposed Act.

Price, Delay, Direct and Indirect Costs

In the definitions in subsection 1(1), the definition of the word “price” is amended in two respects:

First, if the parties have not agreed upon the price, then the price is to be set by the “market value” of the services and materials. Formerly, the price in this circumstance was to be set by the “value”, rendering it uncertain what scale or system of value was to be used.

Second, a new sub-paragraph (b) is added to state that if the contract is extended (that is, if there are delays) then only direct costs qualify as being part of the “price”. The amended definition reads as follows:

“ “price” means,

(a)  the contract or subcontract price,

(i)  agreed on between the parties, or

(ii)  if no specific price has been agreed on between them, the actual market value of the services or materials that have been supplied to the improvement under the contract or subcontract, and

(b)  any direct costs incurred as a result of an extension of the duration of the supply of services or materials to the improvement for which the contractor or subcontractor, as the case may be, is not responsible;” (underlining added)

The latter point about direct costs is further dealt with in subsection 1(1.2) to define what direct costs means, to define some of the possible ingredients of direct costs, and to specifically remove indirect damages from “price”. Subsection 1(1.2) reads as follows:

“Direct costs”

(1.2) For the purposes of clause (b) of the definition of “price” in subsection (1), the direct costs incurred are the reasonable costs of performing the contract or subcontract during the extended period of time, including costs related to the additional supply of services or materials (including equipment rentals), insurance and surety bond premiums, and costs resulting from seasonal conditions, that, but for the extension, would not have been incurred, but do not include indirect damages suffered as a result, such as loss of profit, productivity or opportunity, or any head office overhead costs.” (underlining added)

Comments and Questions

Although “indirect damages” do not now qualify as part of the price for lien purposes, indirect damages may qualify as recoverable damages, if they otherwise so qualify under the general law of contract and damages.

Do these new definitions mean that there can no longer be a debate about whether some of these items are direct or indirect costs for lien purposes?

Thus, in the first group – which is prefaced by the word “including” – is the additional supply of services or materials deemed to be a direct cost, even if the particular supply might, under contract law or accounting, be considered to be indirect? Does the word “including” have that effect?

So far as the second group – prefaced by the words “such as”, are loss of productivity or head office overhead now deemed to be indirect costs, or can it be shown that they are, in fact, law or accounting, direct costs in the particular circumstance? Does the word “such as” mean “for example”, and is that the same as “including”?

In sorting out what is included within or excluded from “direct costs”, the recommendation of the Report may be relevant. In its 5th recommendation, the Report stated that the “definition of “price” should be amended to include direct out-of-pocket costs of extended duration and exclude damages for delay.” (underlining added).

Crown and Municipal Ownership

Alternative Financing and Procurement arrangements

New subsection 1.1 may be summarized as follows:

When, as owner, the Crown, municipality or a “broader sector organization” [which is defined in the Proposed Act to have the same meaning as in the Broader Public Sector Accountability Act, 2010] enters into an agreement to undertake an improvement on behalf of the Crown, municipality or broader sector organization” with a “special purposes entity” then that entity is deemed to be the owner of the premises in place of the Crown, municipality or broader sector organization, and the contract between the entity and the contractor is deemed to be the contract, for the purposes of Part I.1 (prompt payment), Part II.1 (interim dispute resolution), Section 32 (certification and substantial performance), Section 39 (right to information) and any other portion or provision that may be prescribed. (underlining added)

With these exceptions, “the Crown, municipality or broader public sector organization continues to be the owner of the premises for the purposes of this Act,” and:

  “For the purposes of section 22, holdbacks shall be determined in reference to the agreement between the contractor and the special purpose entity.”

  For the purposes of section 85.1 (surety bonds), “the agreement between the contractor and the special purpose entity is deemed to be a public contract.” (underlining added)

Comments and Questions

These provisions relating to special purposes entities are somewhat duplicative, complicated and inter-dependent. The summary above is what I understand the provisions to mean. Exactly how they will work out will depend upon the final wording of the Proposed Act, and future experience and case law.

Definition of municipality

The definition of “municipality” in subsection 2(1) now includes a municipality or local board within the meaning of the Municipal Act, 2001, or a conservation authority established by or under the Conservation Authorities Act or a predecessor of that Act.

Crown and Municipal Land

Section 16 is amended to state that the land of the Crown or a municipality cannot be the subject of a lien. However, a lien may attach to the interest of any other person in the premises.

Under new subsection 16(3), the lien is a charge upon the holdback under section 21 even if the owner of the land is the Crown, a municipality or the land is a railway right-of-way.

Under new subsection 34(3.1), if the land is owned by a municipality, the claim for lien may be served by being given to its clerk.

            Comments and Questions

These amendments contain important clarifications or amendments of the existing law. Now, the prohibition against liening municipal land applies to all municipal land, not just a public street or highway owned by a municipality – as provided for in the Existing Act, subsection 16(3)(c). Now, it is clear that the lien may be a charge upon the holdback even if it is not a lien against Crown or municipal land or a railway right-of-way.

Sureties For Public Contracts

As will be noted in further detail in the second part of this article, if a public contract (defined to be a contract between a contractor and the Crown, a municipality or broader public sector organization) exceeds the prescribed amount, then new section 85.1 requires the contractor to provide the owner with a labour and materials payment bond and a performance bond in the prescribed forms and written by a licensed insurer and in each case providing coverage of at least 50 percent of the contract price.

Holdback, Substantial Performance and General Liens

Section 2 of the Existing Act defines when a contract is substantially performed for the purpose of the Act. It does so by stipulating that, when the cost of completion or correction are not more than certain amounts or percentages, then the contract is substantially performed.

Section 2 is amended by the Proposed Act to change the cost of completion or correction amounts in subsection 2(1) from $500,000 to $1 million, and the deemed completion amount in subsection 2(3) from $1,000 to $5,000 (or 1 percent of the contract price, whichever is the lesser).

In section 2(2), the non-completion of the improvement due to factors beyond the control of the contractor is removed as a reason for deducting the cost of completion from the contract price to determine substantial performance.

Subsection 2(4) of the Act is added to provide that separate improvements on separate lands may, if the contract so provides, be deemed to be made under separate contracts.

Comments and Questions

Does the new subsection 2(4) have any impact on the general lien, which is provided for in section 20? It seems to mean that, if the contract provides as now stated in subsection 2(4), then a general lien cannot arise on both or all improvements on “separate” lands.

Subsection 20(2) of the Present Act states that a general lien does not arise “under or in respect of a contract that provides in writing that liens shall arise and expire on a lot-by-lot basis.” Recommendation 20 of the Report was that “Section 20(2) should be removed from the Act and liens should not be required to be preserved on a lot-by-lot basis.” Apparently, this recommendation will not be implemented as there is nothing in the Proposed Act deleting subsection 20(2).

Indeed, reading the new subsection 2(4) with the existing and remaining subsection 20(2), it seems that the present general lien regime continues to apply but with expanded rights to contract out of that regime, both under the existing right to contract out of it through a contract complying with subsection 20(2), and also under the new subsection 2(4) allowing for the contract to provide that there are separate contracts for “separate improvements” on “separate lands”.

Prompt Payment

New Part I.1 and sections 6.1 to 6.8 implement a “prompt payment” regime. The regime is detailed, so a careful review of it must be undertaken by all construction law practitioners. The following is a basic outline of the regime as I understand it:

  • Section 6.1 mandates the form of a “proper invoice”. Under subsection 6.2(1), unless the contract otherwise provides, a proper invoice must be given by the contractor to the owner each month. Under subsections 6.2(2) and (3), the contract cannot provide that the giving of a proper invoice is conditional on a prior certification of a payment certifier or the owner’s prior approval, but such a certification or approval after the proper invoice is delivered is not affected.
  • Under section 6.3, the owner must pay the proper invoice within 28 days, unless it disputes that invoice and gives a notice of non-payment within 14 days after receiving the invoice. The notice of non-payment must specify the amount of the proper invoice that is not being paid and must detail “all of the reasons for non-payment.” The owner must pay within the 28 days any amount not so disputed.
  • Under section 6.4, subject to giving a notice of non-payment to a subcontractor, the contractor must, within 7 days of receiving the amounts from the owner, pay the subcontractors whose materials or services were included in the contractor’s proper invoice to the owner. If the contractor has received partial payment from the owner, the contractor must pay any subcontractors for whose work the owner has paid the contractor. Otherwise the subcontractors are to be paid on a rateable basis.
  • If the contractor does not give notice of non-payment to a subcontract, then even if it has not been paid by the owner, it must pay any remaining amounts due to the subcontractors within 35 day of sending its proper invoice to the owner.

Under subsections 6.4(5) and (6), the contractor can give a notice of non-payment to a subcontractor:

  1. either due to the fact that it has not been paid by the owner, in which case the notice of non-payment must be made within 7 days of the notice of non-payment by the owner, and the contractor must agree to have the “matter” adjudicated; or
  2. due to the fact that it disputes the subcontractor’s claim in which case the notice must specify the amount not being paid and detail “all of the reasons for non-payment”, and must be given with the said 35 day period.
  • Under section 6.5, similar cascading regimes of payment, non-payment notices, etc. apply to subcontractors with slightly different time periods for notices and payment.
  • This prompt payment regime does not apply to wages.
  • Interest is payable on amounts due under these provisions at the greater of the prejudgment interest rate under the Courts of Justice Act, or the interest rate specified in the contract.

Comments and Questions

Contracting out/Pay-when Paid regimes. The first issue relating to this new prompt payment regime is whether the parties can contract out of it. In particular, does the new prompt payment regime replace and nullify, or enforce by statute, a “pay-when-paid” clause in a subcontract?

As to the first question, subsection 6.2(1) of the new statutory “prompt payment” regime states that proper invoices shall be given to the owner on a monthly basis “unless the contract otherwise provides otherwise.” Do those words apply to the whole regime? Or does that reference in this subsection to the parties’ entitlement to contract out mean that the parties cannot contract out of the other parts of these sections?

And does the “no waiver of rights” provision in section 4 of the Act nullify other conflicting contractual regimes?

As to the second question relating to pay-when paid clauses, two issues arise.

First, does the new prompt payment regime allow pay-when-paid clauses in subcontracts? There is nothing in the prompt payment regime that expressly mentions or nullifies pay-when-paid clauses.

In addition, the further question may be whether the new regime mandates a pay-when-paid regime whether or not the subcontract provides for such a regime. Thus, subsection 6.4(5)(a)(ii) states that the contractor is not obliged to pay the subcontractor under subsection 6.4(4) if it delivers a notice of non-payment to the subcontractor stating that the amount payable to the subcontractor is not being paid due to non-payment by the owner to the contractor. Does this subsection create a right to not pay the subcontractor if the owner has not paid the contractor, even if there is no pay-when-paid clause in the subcontract? Contractors may argue that it does, and that the statute has created a regime which must be followed.

In the United Kingdom under section 113(1) of the Housing Grants, Construction and Regeneration Act 1996 (U.K.), pay-when paid clauses are rendered ineffective unless the third party payor (such as the owner who has not paid the contractor) is insolvent.  This statute is the same one in which, in section 108, the adjudication regime is established. The two subjects – prompt payment and adjudication – are dealt with in the same payment regime, a regime in which pay-when paid clauses are banned except in the case of insolvency.

In the absence of such a prohibition of pay-when-paid clauses in the Ontario statute, does the proposed Ontario prompt payment regime effectively create a pay-when-paid regime which statutes in the U.K. (and in some states in the U.S.A.) have abolished? Where does the Ontario prompt payment regime provide a basis for the adjudicator (or arbitrator or judge) to require payment, either contrary to a pay-when-paid clause or contrary to a notice of non-payment under section 6.4 of the Proposed Act?

Second, if there are reasons why the pay-when-paid or other similar contractual regime could not presently be enforced by the contractor (for instance, if the contractor was the cause of the owner’s non-payment) can those reasons still be advanced by the subcontractor? While there is no provision in the Proposed Act to this effect, subcontractors will likely expect that they can do so. They may utilize the adjudication regime to require payment even though the contractor has served a non-payment notice on the subcontractor, alleging that the owner’s non-payment is due, among other reasons, to the fault of the contractor.

Is the non-payment regime arising from a disputed invoice or subcontractor’s invoice subject to the arbitration or other dispute resolution provisions of the respective contract?   Presumably yes, but there does not appear to be any link between the prompt payment regime and the either the court or arbitral dispute resolution systems. As noted below, this may mean that there are at least four dispute resolution regimes applicable to construction lien disputes.

Similarly, the link to, or impact of the prompt payment regime on, the certification or approval regimes is not entirely clear. Subsections 6.2(3) and (4) provide that a prior certification or approval regime cannot nullify a proper invoice, but it is unclear what the effect is of a certification or approval process after a proper invoice is delivered. Could such a process interrupt the contractor’s entitlement? What is the relationship between an owner’s notice of non-payment and a subsequent certificate denying payment or an owner’s non-approval? Could such a certificate or non-approval be the basis, by itself, of an owner’s notice of non-payment?

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                               September 10, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

Which Takes Precedence In A Building Contract: A Performance Standard Or A Design Standard?

The United Kingdom Supreme Court recently considered the question of whether the performance standard or the design standard prescribed in the contract took precedence. In MT Hojgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor [2017] UKSC 59, the court held that the performance requirement took precedence and that the contractor was liable when the structure failed soon after erection although the structure was built according to the design standard which had an error in it.

This decision generally follows the principle adopted by Canadian courts in holding contractors liable for the structure’s failure to perform as required by the contract even though the structure was built according to specifications issued by the owner.

Background

The contractor MT agreed with the owner E.ON to build the foundations for proposed offshore wind turbines. The technical requirements (“TR”) issued by the owner to bidders stated that “[t]he Works elements shall be designed for a minimum site specific ‘design life’ of twenty (20) years without major retrofits or refurbishments; all elements shall be designed to operate safely and reliably in the environmental conditions that exist on the site for at least this lifetime.”

The TR stated that they were minimum requirements and that the contractor was “to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters” and that “[t]he design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement. The choice of structure, materials, corrosion protection system operation and inspection programme shall be made accordingly.”

The TR required the contractor to prepare the detailed design of the foundations in accordance with an international standard for the design of offshore wind turbines published by an independent classification and certification agency. An equation in that standard was later shown to be erroneous by a factor of 10, leading to the subsequent failure.

The contract between the parties incorporated the TR, which were attached to the contract. The contract required MT “in accordance with this Agreement, [to] design, manufacture, test, deliver and install and complete the Works” in accordance with a number of requirements, including

“(iv)    in a professional manner in accordance with modern commercial and engineering, design, project management and supervisory principles and practices and in accordance with internationally recognised standards and Good Industry Practice; …

(viii)   so that the Works, when completed, comply with the requirements of this Agreement …;

(ix)      so that [MT] shall comply at all times with all Legal Requirements and the standards of Good Industry Practice;

(x)       so that each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice; …

(xv)     so that the design of the Works and the Works when Completed by [Mt] shall be wholly in accordance with this Agreement and shall satisfy any performance specifications or requirements of the Employer as set out in this Agreement. …”

The contract provided that MT was responsible for making good any defects arising for defective materials, workmanship or design which appeared within 24 months of E.ON taking over the works from MT. E.ON was required to produce a Defects Liability Certificate once the Defects Liability Period has expired and MT had satisfied all its obligations. Within 28 days of the issue of a Defects Liability Certificate, MT was entitled to apply for a Final Certificate of Payment, and to accompany the application with a final account. A Final Certificate of Payment was then to be issued which was conclusive. This regime is referred to as the “Defect Liability regime” in this article.

MT proceeded with the design and construction of the two wind farms. The international certifying authority evaluated and approved MT’s foundation designs. MT began the installation of the foundations in December 2007, and completed the Works in February 2009. During 2009 a serious problem came to light at another wind farm. The certifying authority carried out an internal review during late summer 2009, and discovered the error in the equation in the international design standard that had been prescribed by the owner. The foundations were re-built and litigation was commenced to determine which party was responsible for the additional costs.

The trial judge found in favour of E.ON on the grounds that: the contract required the foundations to be fit for purpose; fitness for purpose was to be determined by reference to the TR; and the TR also required the foundations to be designed so that they would have a lifetime of 20 years.

The Court of Appeal reversed the trial judgment. It held that the contract stipulated that the foundations must be constructed in accordance with the international design standard prescribed by the owner, and the other elements of the contract did not render MT liable for an error in that standard.

Decision of the U.K. Supreme Court

The U.K. Supreme Court reversed the decision of the Court of Appeal and re-instated the decision of the trial judge. The elements of its decision may be divided as follows:

  1. The effect of the Defects Liability regime was that “any claim by E.ON in respect of a defect appearing thereafter was barred, and….. there was no room for claims outside the 24-month period….. In my opinion, there is no answer to that analysis so far as it is directed to the effect of [the Defects Liability regime]….Clause 42.3 makes it clear that the provisions of clause 30 (and any other contractual term which provides for remedies after the Works have been handed over to E.ON) are intended to operate as an exclusive regime. And that conclusion appears to…. tie in very well with the notion that there should be no claims after the Final Certificate, which is to be issued very shortly after the 24-month period.”
  2. This reading of the Defects Liability regime helped to resolve the tension between the 20 year performance standard and other parts of the contract:

“In the light of the normal give and take of negotiations, and the complex, diffuse and multi-authored nature of this contract, it is by no means improbable that [MT] could have agreed to a 20-year warranty provided that it could have the benefit of a two-year limitation period, save where misconduct was involved. It would simply mean that the rights given to E.ON by paras 3.2.2.2(ii) were significantly less valuable than at first sight they may appear, because any claim based on an alleged failure in the foundations which only became apparent more than two years after the handover of the Works would normally be barred by clause 42.3. In this case, of course, there is no problem, because the foundations failed well within the 24-month period.”

  1. The true meaning of the 20-year performance term was, not that the structures would last for 20 years, but that they would be designed to last for 20 years:

“….there is a powerful case for saying that, rather than warranting that the foundations would have a lifetime of 20 years, para 3.2.2.2(ii) amounted to an agreement that the design of the foundations was such that they would have a lifetime of 20 years. In other words, read together with clauses 30 and 42.3 of the Contract, para 3.2.2.2(ii) did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last for 20 years without replacement. …… Rather than the 20-year warranty being cut off after 24 months, E.ON had 24 months to discover that the foundations were not, in fact, designed to last for 20 years. On the basis of that interpretation, E.ON’s ability to invoke its rights under para 3.2.2.2(ii) would not depend on E.ON appreciating that the foundations were failing (within 24 months of handover), but on E.ON appreciating (within 24 months of handover) that the design of the foundations was such that they will not last for 20 years.”

   It is unnecessary to decide whether para 3.2.2.2(ii) is a warranty that the foundations will have a lifetime of 20 years or a contractual term that the foundations will be designed to have such a lifetime. The former meaning has been taken as correct by the parties and by the courts below, but, for the reasons given in paras 28 to 31 above, I am currently inclined to favour the latter meaning…… However, it is clear that, if para 3.2.2.2(ii) is an effective term of the Contract, it was breached by [MT] whichever meaning it has, and therefore the issue need not be resolved.

  1. The legal resolution of the tension between the prescribed performance (which the court called the “prescribed criteria”) and the prescribed design may be resolved as follows:

“Where a contract contains terms which require an item (i) which is to be produced in accordance with a prescribed design, and (ii) which, when provided, will comply with prescribed criteria, and literal conformity with the prescribed design will inevitably result in the product falling short of one or more of the prescribed criteria, it by no means follows that the two terms are mutually inconsistent. That may be the right analysis in some cases…… However, in many contracts, the proper analysis may well be that the contractor has to improve on any aspects of the prescribed design which would otherwise lead to the product falling short of the prescribed criteria, and in other contracts, the correct view could be that the requirements of the prescribed criteria only apply to aspects of the design which are not prescribed. While each case must turn on its own facts, the message from decisions and observations of judges in the United Kingdom and Canada is that the courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer or employer has specified or approved the design, it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed.” (underlining added)

In arriving at its conclusion, the U.K. Supreme Court relied upon two Canadian decisions, The Steel Company of Canada Ltd v Willand Management Ltd., [1966] S.C.R. 746 and Vancouver Water District v North American Pipe & Steel Ltd., 2012 BCCA 337. In both those cases, the contractor was held liable when the work failed to live up to the performance standard in the contract even though the contractor used the specifications provided by the owner.

  1. In applying this principle in the present case and in finding in favour of the owner, the Court of Appeal concluded as follows:

“The opening provision of Section 3, para 3.1, (i) “stresse[s]” that “the requirements contained in this section … are the MINIMUM requirements of [E.ON] to be taken into account in the design”, and (ii) goes on to provide that it is “the responsibility of [MT] to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters”. In those circumstances, in my judgment, where two provisions of Section 3 impose different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the correct analysis by virtue of para 3.1(i) is that the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement. Further, if there is an inconsistency between a design requirement and the required criteria, it appears to me that the effect of para 3.1(ii) would be to make it clear that, although it may have complied with the design requirement, [MT] would be liable for the failure to comply with the required criteria, as it was [MT’s] duty to identify the need to improve on the design accordingly.” (underlining added

  1. Having arrived at this interpretation of the contract as being the proper one, the Court of Appeal did not accept a number of submissions of the contractor as to why that interpretation should not be accepted, including:
    1. The “diffuse and unsatisfactorily drafted nature of the contractual arrangements, with their ambiguities and inconsistencies, [which] should be “recognised and taken into account”;
    2. The fact that the “onerous obligation” upon which the court’s interpretation rested “is found only in a part of a paragraph of the TR, essentially a technical document, rather than spelled out in the Contract.”
    3. This interpretation would or would not render the requirements in the TR redundant having regard to the terms of the contract itself.

Discussion

The MT Hojgaard decision contains a fascinating and important analysis of the factors which may assist a court to resolve the apparent conflict between a prescribed criteria (which I have called a performance standard) and a design criteria in a contract, or in the event of conflict, to determine which standard should takes precedence. The court stated the principle that, and the reasons why, the prescribed criteria will generally be given precedence over a design criteria, even a design criteria by the owner.

In the course of its decision, the U.K. Supreme Court considered almost all the conceivable factors relating to the interpretation of these sorts of contractual provisions. The decision provides, therefore, a good check-list for persons drafting or litigating these provisions.

The fact that the U.K. Supreme Court relied upon two Canadian decisions is significant. However, the court did not refer to any Canadian decisions on the other side of the ledger. There are many cases in which the owner’s claim against the contractor has been dismissed on the basis that the contractor had not given a warranty of the life or other criteria of the structure, or that the owner had not relied upon the contractor’s skill and judgment for the design of the structure. One of the leading Canadian decisions to this effect is CCH Canadian Ltd. v. Mollenhauer Contracting Co., [1976] 1 S.C.R. 49.

The debate in Canadian cases often turns on whether the owner relied upon the contractor’s skill and judgment, and whether the agreement of the contractor truly represents a warranty of performance. These elements of the usual Canadian analysis are not evident in the MT Hojgaard decision of the U.K. Supreme Court. Perhaps they were inherent in the court’s interpretation of the performance standard. But if reliance on the contractor’s skill and judgment is something that can be shown objectively from the parties’ conduct, and not merely from the words of the contract, it may be doubtful in this case that the owner really relied upon the contractor’s skill and judgment in relation to the international design standard contained in the TR issued by the owner.

In addition to resolving the tension between the design and performance standards in the contract, there are two other interesting aspects of the MT Hojgaard decision.

The first is the court’s interpretation of the term relating to “20 years without replacement” and its finding that this term “did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last for 20 years without replacement.”

The second is the court’s interpretation and use of the Defect Liability regime. The court held that this regime meant that, while the “20 years without replacement” term existed in the contract, it could only be enforced during the 2 years after the owner took over the project after which the owner’s rights terminated. The court relied upon this interpretation to resolve the tension between the performance and design criteria.

It can be predicted that Canadian courts will pay close attention to both these approaches.

Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 4, sections 3(i) and 5 and Chapter 7, section 7(c)(ii).

MT Hojgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor [2017] UKSC 59

Building Contracts –performance and design standards and defects – warranty period

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                   August 24, 2017

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

A Subcontractor Recovers Against The Owner In Unjust Enrichment

A subcontractor who fails to register a construction lien faces an uphill battle in asserting a claim in unjust enrichment against the owner. That is because the owner will rely upon its contract with the contractor for any benefit that the owner has obtained from the subcontractor’s work. The owner will also assert that there is no equitable reason to grant an unjust enrichment remedy to a subcontractor who could have asserted a construction lien remedy but failed to do so.

Sometimes, however, the subcontractor’s unjust enrichment claim fits within the narrow opening between the owner’s contractual and construction lien defences, and N.K.P. Painting Inc. v. Boyko 2016 CarswellOnt 7332, 2016 ONSC 3016 was such a claim.

Background

The owner contracted with the prime contractor for the refurbishment of the corridors of the building. The prime contractor retained NKP as the subcontractor to supply painting and wallpapering material. During the project, the owner issued progress payments to the general contractor, less the applicable statutory holdback. NKP completed its work and invoiced the prime contractor. A total of $28,928.00 was not paid by the prime contractor to NKP, and the prime contractor became insolvent. Neither NKP nor the prime contractor registered liens. The owner held back a total of $23,893.74 under the prime contract.

Decision

The Superior Court judge held that there “is no reason to deny the appellant access to the common law remedy of unjust enrichment because it did not avail itself of potential statutory remedies,” as long as the ingredients of the unjust enrichment remedy were satisfied.

The court found that the owner had retained the 10 percent holdback, and that there was no claim against that holdback for deficiencies. While there was evidence of a claim by another subcontractor, there was no evidence about the status or disposition of that claim and no evidence to suggest that anything other than the full amount of the holdback remained available and under the control of the owner.

The court therefore concluded that “it would appear clear that [the owner] has been enriched in the sense that it has received 100% of the benefit of the invoiced renovation work performed but has only paid 90% of the invoiced amounts” and that “the enrichment corresponds to the efforts of NKP through the renovation work performed for which it has received no compensation.”

The court then considered the third element in the claim for unjust enrichment, namely whether there was a juristic reason for the benefit and corresponding deprivation. While that juristic reason may be a contract, that reason could only apply:

“where the party advancing the claim for unjust enrichment is a party to the contract, as is the party against whom the claim is advanced. On the facts of the case before me, that would require a contract between NKP and [the owner]. There is no such contract. In other words [the owner’s] enrichment and NKP’s deprivation did not arise in the context of a contract between these two parties…I therefore conclude that there is no established category of juristic reason to deny recovery to the Appellant.”

The court then considered the reasonable expectations of the parties and public policy and found that neither factor should deprive NKP from a remedy in unjust enrichment:

“In my view it cannot have been within the reasonable expectation of the parties that [the owner] would receive a 100% benefit of renovation work invoiced, including NKP’s efforts, while paying only 90% of the cost of those efforts. [The owner’s] statutory obligation to retain the holdback has expired and had expired at the time of trial. There was no legal requirement at trial for [the owner] to retain the funds by way of holdback, nor did [the owner] retain any legal entitlement to those funds….The purpose of the holdback funds is to represent a potential source of funds from which to compensate unpaid providers of service and materials to the improvement of a property. It is remedial in nature….Thus [the owner] could not reasonably have expected to retain the funds and indeed were it to do so it would represent a windfall.”

The court held that the owner’s enrichment was the amount of the holdback held by the owner, and granted judgment for that amount in unjust enrichment in favour of the subcontractor.

Comment

The court arrived at a fair result but, it is submitted, the court’s conclusion is incorrect that a contract must be between the claimant and the defendant before it can be a defence to a claim in unjust enrichment.

There are many cases in which a contract has been held to be a defence to an unjust enrichment claim even though the contract was not between the unjust enrichment claimant and defendant. In most cases, the contract was between the defendant and a third party. For example, if an owner enters into a prime contract with a contractor and pays the contractor in full, including the holdback, then that prime contract is a juristic reason why the owner should not have to pay the subcontractor, which has been unpaid by the contractor but has not filed a construction lien. Requiring the owner to pay twice is not fair, either from a contract or construction lien perspective.

There are even some cases in which the contract between the claimant and a third party has been held to be a juristic reason for the claimant being denied an unjust enrichment remedy against the defendant. For example, a subcontractor has been denied an unjust enrichment remedy against an owner due to the subcontract between the subcontractor and contractor. However, unless the claimant has been paid in full under the subcontract, it is harder to justify that conclusion since there seems to be no good reason why the owner should be entitled to rely upon a subcontract to which it is not a party as a juristic reason for not paying the unpaid subcontractor.

However, the present case fits within the crack between the owner’s juristic reason defences, both based upon its prime contract with the contractor and upon the construction lien regime. The work under the prime contract had been entirely completed but the owner had not paid out the holdback under that contract. So there was no juristic reason under that contract why it should not be compelled to pay the holdback to the subcontractor.

And under section 8 of the Construction Lien Act, the holdback was held in trust “for the benefit of subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor…”. Therefore, even though the subcontractor had not filed a lien, there was a good juristic reason why the owner should pay to the subcontractor the monies in its hands that were due under the prime contract.

The validity of the subcontractor’s unjust enrichment claim extended to the amount held back by the owner, not the amount which the subcontractor had not been paid by the contractor. Payment of the former amount did not penalize the owner under the prime contract nor over-stretch the statutory trust fund remedies, while payment of the latter amount would have.

Another fact to note in this case is that the prime contractor’s trustee in bankruptcy did not assert a claim to the holdback. Accordingly, whether such a claim could have been asserted, in view of the trust fund provisions of the Construction Lien Act, was not considered.        

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 4.

N.K.P. Painting Inc. v. Boyko 2016 CarswellOnt 7332, 2016 ONSC 3016

Building contracts – construction and builders’ liens – unjust enrichment – juristic reason defence

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                                   August 20, 2017

www.heintzmanadr.com

www.constructionlawcanada.com