Federal Exemption from Liens is No Simple Matter

Author: Corbin Devlin

With significant recent and ongoing expansion at the Calgary, Edmonton and Fort McMurray airports, a number of trades have been interested in the question whether airports are subject to builders’ liens. In the recent Alberta decision Park Avenue Flooring Inc. v. EllisDon Construction Services Inc., the judge states categorically that the Alberta Builders’ Lien Act has no application to the Calgary Airport because it is federal property. This is the first time a court has made such a clear pronouncement on this issue in Alberta.

The issue is canvassed more fully in the 2009 B.C. case Vancouver International Airport v. Lafarge Canada Inc.

Constitutional Questions
 
The issue is actually more complex than the decision in Park Avenue Flooring case might suggest. It is not every construction project relating to an airport that is exempt from provincial lien legislation. First, an interest in land owned by the federal government is clearly exempt. But... not all airport lands are owned by the federal government. Second, an operation or “undertaking” that is within the jurisdiction of the federal government may be exempt (whether or not the lands in question are owned by the federal government) based on constitutional principles. The federal government clearly has jurisdiction over aeronautics. But this doesn’t mean that airports are exempt from provincial legislation for all purposes and in all cases; various case-specific considerations might come into play, such as the degree of federal control over the operation or undertaking… and not all airports are subject to the same degree of federal control. Third, there may be multiple interests in land at an airport; i.e. the federal government, the airport authority, airlines, hotels, car rental agencies, concessions... Different considerations may come into play depending which interest in land is in issue; the cases referenced here do not resolve the question whether subsidiary interests (e.g. leases) in airport lands could sometimes be subject to liens at the same time other interests are exempt.

Airports
 
Although it would be easy to suggest that airports are categorically exempt from lien legislation based on the Park Avenue Flooring case, it would be a mistake to interpret the court’s comments in that case too broadly. It remains arguable that not all interest in airport lands are exempt from provincial lien legislation. But no doubt valid provincial lien rights at airports would very much be the exception.

Interpreting a "Withholding of Payments" Clause

Author: Corbin Devlin

A contract provision that permits an owner to withhold payment from a contractor is not a “penalty” clause.

Penalty Provisions
 
The courts do not like, and typically do not enforce, “penalty” clauses. For this reason, liquidated damages clauses in favour of the construction owner generally have to be based on a “genuine pre-estimate of damages” in order to avoid the court striking the liquidated damages clause down.

No Further Payment Provisions
 
In a recent Ontario case, Ottawa Community Housing Corp. V. Foustanellas, the contractor argued that a clause providing that (in certain instances of default) “the obligation of the Owner to make payments will cease” was a penalty clause, and therefore not legally enforceable. The contractor was overbilling the owner, and consequently the owner acted on a clause in the contract that permitted the owner to “take work out of the hands of the Contractor.” The owner then hired someone else to complete the work, but the Contractor sued to recover payment for the work it had performed before the owner took the work out of its hands.

Specifically, the contract permitted the owner, upon default by the contractor, to “take the whole operation, or any part of the operation out of the hands of the Contractor.” The owner relied upon that clause and a further clause stating:   “…where any or all of the work has been taken out of the hands of the Contractor, the Contractor will not be entitled to any further payment, including payments then due and payable but not yet paid. The obligation of the Owner to make payments will cease, and the Contractor will be liable upon demand to pay the Owner an amount equal to all of the losses and damages incurred by the Owner for the non-completion of the work.”

The court decided this last clause did not erase the debt due to the contractor (if any). It suspended payments due to the contractor (if any) until a final accounting could be done, after the owner had the work completed by others. Since the clause only suspended payments, and it did not erase the debt, it was not a penalty clause. It was enforceable.

Debts Owing vs. Payments Due
 
This is not a surprising outcome or new law. But it is useful case authority for the interpretation of a fairly common contract provision. It is also a reminder of the distinction between a debt owing and a payment due. This is a deceptively simple distinction that is essential to proper interpretation of construction contracts and lien legislation. I frequently see misinterpretations of contract and lien legislation due to misunderstandings on this point. In the Foustanellas case, it appears that the contractor went to trial on the misinterpretation that the default provisions in the contract erased the debt, whereas the proper interpretation was that the default provisions merely suspended the payment obligation.

The court called this “a ‘stop payment’ provision. It is designed to halt the owner’s contractual obligation to make any payments to the contractor pending determination of the owner’s losses and damages arising from the contractor’s breach of contract.” In Foustanellas, the debt was erased, but not because of a penalty clause. The debt to the contractor was erased because the owner’s increased cost to complete the work as a result of the contractor’s default exceeded the value earned by the contractor prior to the default.

Towards a More Relaxed Interpretation of the Builders' Lien Act

Author: Corbin Devlin

A few recent cases from Alberta Masters show a trend towards a less strict interpretation of lien deadlines and requirements. In particular, these cases suggest that equitable considerations may sometimes operate to avoid the strict interpretation of the statute.

Saving a Lien Through Estoppel
 
The most recent example is the decision of Master Prowse in Boulevard Real Estate Equities Ltd v 1851514 Alberta Ltd.

A lien claimant discharged its' lien when the owner promised payment. When the owner failed to come through with payment, the lien claimant re-registered a lien - even though it was out of time. The owner applied to court to ask for the lien to be discharged on the grounds that it was registered out-of-time. The Master held that the promise to pay, which the lien claimant relied on to miss the lien registration deadline, estopped the owner from obtaining a discharge of the lien. The owner's promise created a "promissory estoppel" that prevented the owner from relying on the strict operation of the legislation. In effect, equitable considerations overruled the strict interpretation of the legislation.

The Master made a point of observing that only the rights of the owner and the lien claimant were in issue. If a third party would be affected (prejudiced), then the Court would have to strictly follow the legislation.

Not a Unique Case
 
This case seems to indicate a trend, as a similar result was obtained in TRG Developments Corp. v. Kee Installations Ltd.

In that case, a lien was lost because the lien claimant did not register a lis pendens within 180 days of lien registration as required by the statute. But the court ordered the lien to be restored because, even though the requirements of the legislation were not strictly followed, the lien claimant had started a proceeding in which the validity and value of the liens could be determined, and nobody was prejudiced by the failure to register the lis pendens. This decision was upheld on appeal.

The Problem With The Trend
 
At first blush, it is hard to argue against introducing principles of equity and fairness into the interpretation of the Builders' Lien Act, particularly when all the affected parties are before the court. This trend certainly benefits the lien claimant. But there are competing considerations – such as protecting the rights of construction owners and lenders.

For one thing, a more relaxed interpretation of the legislation is less predictable, and so we might see a corresponding increase in lien litigation, at least until there are additional reported cases to clarify the issue. More significantly, this development may cause practical concerns for those who rely on the predictable operation of the lien legislation to make lending and payment decisions (owners, lenders and construction managers). There is some comfort in the Master's assurance that the doctrine of promissory estoppel will not operate if any third party would be prejudiced. On the other hand, liens affect contractual rights in addition to statutory rights. Lending and payment decisions are made every day based on lien deadlines elapsing, and based on the registration or non-registration of liens – in other words, based on an assumption that the lien legislation will be strictly enforced. The commercial consequences of allowing an expired lien to be restored may therefore extend beyond the obvious.

Arbitration Clauses and Lien Rights

Author: Corbin Devlin

Lien rights can’t be enforced through arbitration, but many construction contracts provide for mandatory arbitration. In a recent decision, West Coast Installations, Inc. v. Frazier Industrial Co., the Alberta Court explained how arbitration clauses and liens can co-exist. This is not new law, but it is useful clarification of an issue that comes up time and again.

Arbitration Clauses
 
Many construction contracts provide that the parties choose to resolve their disputes outside of court, usually by arbitration. The courts will give effect to these agreements – that is, a party who has agreed to resolve a dispute by arbitration may find his case thrown out if he tries to proceed instead by way of a lawsuit.

Lien Rights
 
Lien rights can only be enforced by the courts. Section 8 of the Builders’ Lien Act makes it clear that the parties cannot contract out of the remedies provided by the Act. As stated by the court, in the West Coast Intallations case: “That does not mean that the parties to a contract cannot agree to have the substance of any dispute referred to arbitration, but it means that the party who has done the work cannot be prevented from claiming a builder’s lien and similarly the landowner or the general contractor cannot be prevented from providing security to stand in place of the lien under section 48 of the Builders’ Lien Act. These are remedies available under the legislation.”

A Pause in the Legal Process 
 
In the West Coast Installations case, the lien claimant sued despite the existence of a mandatory arbitration clause. (In fact, the lien claimant probably had no choice but to sue, to preserve its’ lien rights in accordance with the Builders’ Lien Act.) On a court application by the counterparty, the court issued a stay of proceedings. That is, the court referred the dispute to be resolved by arbitration, and directed that the parties could return to court only after the arbitration concluded, or upon settlement of the dispute, for the court to give directions in respect of the claimant’s lien rights. In this way, the court process would be put on pause, the substantive dispute between the parties would be resolved by an arbitrator, and then a judge would (if necessary) give effect to the arbitrator’s decision by enforcing the claimant’s lien rights. 

Allowing for some minor variations in the process, there is no doubt that lien rights and arbitration clauses can co-exist. In many cases, co-existence would not be the subject of any real dispute; the court process would be paused (“stayed”) by agreement while the arbitration proceeds.

More Frequently Asked Lien Questions

Author: Corbin Devlin

I am frequently asked by owners, contractors or construction managers, which subcontracts or material supply contracts are subject to lien holdback requirements? There is an easy answer to this question, and a hard one.

The Legislation 

The easy answer is that the Alberta Builders’ Lien Act only requires a lien holdback by the owner. So, only those contracting directly with the project owner are required by statute to submit to a 10% holdback – and it is the owner, not the contractor, that has the statutory obligation to hold back this amount.

It does not matter if the owner is dealing with a general contractor, trade contractor, material supplier or other service provider; if they have lien rights, and they are contracting directly with the owner, then the owner should (indeed, must) take a 10% holdback from them.

The Subcontract
 
If the legislation does not require it, why is there usually a 10% holdback on subcontracts? The answer to this question is found in the subcontract itself. In Alberta there is no statutory requirement for holdback on subcontracts; but this requirement is found in most subcontracts (including standard forms), and arguably it is a standard industry practice in some sectors even if there is no subcontract in writing. In other words, subcontractors are not required by statute to allow for a 10% holdback – but they are often required by contract to allow for a 10% holdback.

There is good reason for the contractor (the party contracting directly with the project owner) to provide for a holdback in its’ subcontracts. It is a question of risk and cash flow. The contractor is at risk of liability to the owner if liens are registered by subcontractors or those further down the chain, so the holdback gives the contractor a measure of protection. If the contractor will not receive its’ holdback until substantial completion, then in accordance with the lien legislation, the contractor will want to protect its’ cash flow by taking a corresponding holdback from its’ subcontractors.

This is one of those issues that varies from province to province. For example, in Saskatchewan, a holdback on subcontracts is required by statute, unlike Alberta which leaves this issue to be dealt with by contract law.

Material Suppliers and Service Providers  

What about material suppliers, or those who supply only services? As far as the legislation goes, the same analysis applies. However, in some sectors it is uncommon for material suppliers, or those who supply only labour or services, to agree to a 10% holdback by contract. Certain material suppliers have the clout to refuse to allow holdbacks and for some reason lien holdbacks are simply unusual for some service providers (particularly design professionals). It is often overlooked that even these parties who would purportedly refuse to allow lien holdbacks can’t escape the legislation; if they have lien rights, and they are in a direct contract with the owner, the owner is not only permitted but required to withhold 10% from them.

In short, it is a question of contract law as to whether subcontractors, material suppliers and service providers – those who are not in a direct contractual relationship with the project owner – are subject to a holdback. In theory, the contractor has to negotiate for this right when it is negotiating payment terms with its’ subcontractors, material suppliers and service providers. In some sectors (i.e. the major trades), this is no issue. In other sectors such holdbacks are not the norm. When a party with lien rights refuses to agree to a holdback, the contractor can negotiate the issue, incur the risk, or find another party to contract with.

Mischievous Liens

Author: Corbin Devlin

From time-to-time we see lien legislation abused or distorted for mischievous purposes. Anyone who deals with liens on a regular basis has witnessed such abuse. Anyone involved in the lien process – owners, contractors, subcontractors, suppliers, and yes even lawyers – can be guilty of such abuse.

One of the more common abuses is the mischievous lien registered by a subcontractor. The registration of a lien can have fairly significant consequences. It will often disrupt project financing and suspend further payments by the construction owner. It can also be costly to get resolved. All experienced subcontractors know this, and use it to their protection or advantage when appropriate. Unscrupulous subcontractors will register liens even when they know they do not have the right to do so.

Cancelling the Lien
 
Last week I was pleased when a Master of the Court of Queen’s Bench, in an unreported decision, cancelled a subcontractor’s builders’ lien and ordered the lien claimant to pay legal costs to the contractor. Not only was the subcontractor’s lien registered out of time (the subcontractor had falsely claimed that work was ongoing, in an attempt to extend the lien period), the lien was also registered for an improper amount (there was strong evidence that the subcontractor had inflated the lien amount).

It is not an easy thing to get a lien removed on the grounds that it is improper or mischievous. The lien legislation is considered “remedial” in nature (which is often used to justify a broad interpretation in favour of the lien claimant). A court application to remove a lien is usually done based on affidavit evidence (i.e. without a full trial) such that the courts are reluctant to make decisions when there is any controversy on the facts. Also, the courts are sympathetic to smaller lien claimants – even though it is often a false assumption that smaller lien claimants are unsophisticated; many of them know their lien rights very well.

Lack of Merit

In this particular case, the contractor’s attempt to cancel the mischievous lien was not guaranteed to be successful as there was disputed evidence. The Master relied on a new line of authority, including a recent Supreme Court of Canada case, to order the cancellation of the lien. Based on this new line of cases, the Court should consider if there is any claim "of merit" and if there isn't, the matter should be dismissed summarily and without the time and expense associated with bringing the case to trial. Although the Supreme Court of Canada was not dealing with a lien case, this reasoning is applicable to the lien context, considering that the Builders’ Lien Act expressly provides “The procedure in adjudicating on the claims shall be of a summary character, so far as is possible, having regard to the amount and nature of the liens in question and the enforcement of them at the least expense” (s. 49(6)). So, the Master did not actually have to go so far as to conclude that the lien was mischievous or improper; he cancelled the lien upon determining that the lien did not have sufficient merit to justify further legal process.

Lien rights are an important protective mechanism for contractors, subcontractors, service providers and material suppliers. But the lien process is complex, and unfortunately this complexity means there are ways to manipulate the process. This case was a gratifying reminder that the Court can sometimes identify such mischief on a summary application, and deal with it appropriately.

Arbitration – Quicker, Yes. Cheaper, No

Author: Corbin Devlin 

I often get asked, is arbitration preferable to going to court? While the correct answer depends on the context, there are four key considerations that guide my response: 

Efficiency
Arbitration is often much quicker than litigation. The court system in Alberta is backlogged. The Rules of Court are more concerned with fairness than efficiency (mind you, that's not always a bad thing). As a result, arbitration can usually be measured in weeks or months from start to finish, but getting a lawsuit to trial can sometimes take years. 

Cost 
Arbitration is just as costly as litigation, often more. Procedural steps can sometimes be limited or omitted from an arbitration process, which can save cost (and time). But such streamlining is the exception, not the rule. Parties can create a streamlined process if they mutually agree, but more often arbitration looks very similar to the litigation process. If the process is much the same, then the cost will be much the same. Except that in arbitration, you have to pay for the private arbitrator, usually by the hour, unlike litigation, where the judge's salary is paid by the taxpayer. 

Confidentiality 
This is an important consideration that is too-often overlooked. Arbitration can be confidential (if the parties so agree); trials are public. Confidentiality can be important for many reasons, such as avoiding the creation of a precedent, shielding competitive information, and protecting corporate reputation. 

Choice 
There is very little opportunity to influence the assignment of the judge if your case goes to court. On the other hand you get to choose your arbitrator. More accurately, an arbitrator is usually selected by mutual agreement, or some process where one party nominates candidates for consideration and acceptance by the other party. This is unlikely to result in one party gaining a decision-maker that is biased in their favour. But this usually ensures that the decision-maker has highly appropriate background and qualifications. The ability to choose your decision-maker in an arbitration process can promote efficiency and predictability, and sometimes leads to a more just result. 

Other Factors There are other considerations of course. For example, litigation provides greater certainty in terms of process (through hundreds of years of jurisprudence); arbitration can allow the parties to be creative in establishing their own process. Litigation provides a right of appeal; arbitration typically does not (mind you, once again, that's not always a bad thing). But in my experience, the key considerations are efficiency, cost, confidentiality and choice. 

So what's the answer? Whether arbitration or litigation is preferable depends on the context of the dispute. Arbitration has many advantages. Just keep in mind, cost is generally not one of them.

Court Denies Coverage for Property Damage “Connected” to Faulty Workmanship

Author: Corbin Devlin 

 The Alberta Court of Appeal has issued an important decision that narrows the scope of all risks insurance coverage.  The court was grappling with the question whether damage to a project resulted from “poor workmanship” or is “resulting damage.” The “cost of making good” poor workmanship is excluded from coverage under the typical all risks policy, while resulting damage is covered.

Scratched Windows
 
The claim arose during the construction of the EPCOR Tower in Edmonton (Ledcor Construction Limited v Northbridge Indemnity Insurance Company). The subcontractor Bristol was hired to clean the exterior of the building when the project was nearly complete. Bristol scratched the windows on the tower by using inappropriate tools and methods, and the glass had to be replaced at great expense. 

The insurer denied that the replacement cost was covered by the all risks insurance policy. In 2013, a judge determined the replacement of the glass was covered.  In particular, the trial judge found that the insurance policy was not clear as to whether replacing the glass was a cost of making good faulty workmanship, or a cost of repairing resulting damage. The trial judge said that any ambiguity in the insurance policy must be resolved in favour of the claimant. The cost of replacing the glass was therefore covered.

A Reversal
 
Now, the Alberta Court of Appeal has reversed this decision by the trial judge, saying that the all risks policy is not ambiguous at all.  The court says that the “dividing line” between poor workmanship and resulting damage is determined by “physical or systemic connectedness”. Some property damage caused by faulty workmanship may still be covered. But the damage was excluded from coverage in this case because the scratched windows are too closely connected to the window cleaning work. 

The Court expresses a principle of general application as follows: “The exclusion (considered together with the exception) excludes from coverage the cost of redoing the work. But it also excludes damage connected to that work, such as any damage caused to the very object or part of the work on which the faulty workmanship is being applied. In this case, the cost of redoing the exterior cleaning of the EPCOR Tower is admittedly excluded. Also excluded is the damage to the windows being worked on at the time, which damage was directly caused by the cleaning activities that constituted the faulty workmanship. This damage was not only foreseeable, but it was highly likely (even inevitable) that this type of damage would result if the work was done in a faulty way. That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.”

Connected and Foreseeable
 
Other words, the Court is saying that property damage is excluded from all risks insurance coverage if the damage is the foreseeable and direct result of faulty workmanship. Sounds straighforward? To interpret the policy in this particular case required a trial and a detailed examination of the nature of the work, the various parts of the project, the foreseeability of the damage, and other factors. The question of “physical or systemic connectedness” still leaves plenty of room for disputes over the scope of coverage.

There is no doubt the Court has endorsed a narrower interpretation of all risks insurance coverage.  But it is important to note that the specific wording of all risks policies may vary, and different circumstances might result in an interpretation more favourable to the claimant, in cases of property damage caused by faulty workmanship.

"Incorporation by Reference" – More Dangerous Than it Sounds

Author: Corbin Devlin 

 It is common, almost universal, to find a clause in a construction subcontract that incorporates the prime contract by reference. However, the effects of such a clause can vary greatly. Too often, these provisions are considered boilerplate and they not given the consideration they deserve, by general contractors and subcontractors alike.

Alternate Approaches
 
These “incorporation by reference” clauses usually leave unanswered questions, particularly whether they are effective to incorporate the general conditions of the prime contract (e.g. payment terms, liquidated damages, dispute resolution, warranty…?) and if so, just exactly how the general conditions of the prime contract apply to the subcontractor.

The most comprehensive clause is one that not only incorporates the prime contract but also expressly binds the subcontractor to all prime contract terms; e.g. “any reference to Owner in the prime contract is interpreted as a reference to the Contractor, and any reference to Contractor is interpreted as a reference to the Subcontractor.” Such language is favored by some general contractors – it is no doubt very protective of the general contractor. CCA1 uses similar language. While such a clause might seem quite explicit, the cases show that such a clause actually leaves much room for dispute when it comes to the legal effect of the prime contract general conditions on the subcontractor. The general contractor’s relationship with the subcontractor is not a mirror image of the owner’s relationship with the general contractor, and so this type of clause leaves room for ambiguity. Ambiguity eventually leads to dispute, which does not benefit the general or the sub.

Another common approach is a relatively simple clause that states, in essence, “the prime contract is incorporated by reference.” This approach is less comprehensive from the owner's perspective. There is a body of case law that indicates such a clause really just incorporates those aspects of the prime contract that have clear application to the subcontractor; i.e. the drawings, specifications and schedule – but typically not the general conditions. Such a clause is therefore less ambiguous than our first example, although it is still open to dispute.

Another approach is to reference (or attach) specific provisions of the prime contract into the subcontract. This selective approach leaves much less room for ambiguity. It requires more work at the drafting stage, and is therefore much less common.

The best practice (in strict legal terms) may be to avoid incorporation by reference completely, by writing a subcontract that reinforces and coordinates with the relevant terms of the prime contract. But such a fulsome approach is usually quite impractical.

The Subcontractor Who Never Sees the Prime Contract 
 
It is all too common that the subcontractor does not actually obtain or review the prime contract terms and conditions that are supposedly incorporated by reference. In such cases, the proper interpretation of the subcontract may depend on whether the subcontractor is in fact given access to the prime contract, or the relevant parts of it.

Sometimes a subcontractor is not given access to the prime contract. There is case authority suggesting that it will invalidate the “incorporation by reference” clause if the general contract denies the subcontractor access to the prime contract. Similarly, if a subcontractor is only given access to parts of the prime contract, the subcontractor has a good legal argument that the “incorporation by reference” is limited to those parts. 

Of course, it is a different scenario if the prime contract terms and conditions are made available to the subcontractor, but  fails to avail itself of the opportunity. Every time a subcontractor agrees to a clause that incorporates the prime contract by reference, without reviewing the prime contract terms and conditions, that subcontractor incurs a considerable legal risk.