Lien Pitfall – Liening the Wrong Interest

Author: Corbin Devlin

A common pitfall for lien claimants is the risk of liening the wrong interest in land. The most common example of this error is the lien against the owner’s title (fee simple) in relation to work performed at the request of a tenant.

Liens Against Tenants
 
When work is done for a leasehold tenant, a lien may be claimed against the leasehold estate. This is because a builders’ lien relates to the interest of an “owner” as that term is defined in the Alberta Builders’ Lien Act (the "Act"). Confusingly, the definition of “owner” in the Act is not necessarily consistent with other legal concepts of ownership or common sense.

In section 1 of the Act, “owner” is defined as follows:

"owner" means a person having an estate or interest in land at whose request, express or implied, and

1. on whose credit,
2. on whose behalf,
3. with whose privity and consent, or
4. for whose direct benefit,

work is done on or material is furnished for an improvement to the land and includes all persons claiming under the owner whose rights are acquired after the commencement of the work or the furnishing of the material.

This wordy definition means that when a registered landowner hires a contractor, the contractor has the right to lien the title of the land. However, when a tenant hires a contractor, the contractor has the right to lien the tenant’s lease. (It is usually the case, when work is performed for a tenant, that the tenant meets the statutory definition of “owner,” while the actual registered legal landowner does not qualify as an “owner” as defined in the Act.)

Liens Against Landlords
 
Fortunately (for lien claimants) that is not the end of the story. There may be multiple “owners” for lien purposes – with the consequence that multiple interests in land can be liened.

A lien in relation to work done for a tenant may also be claimed against the estate of the holder of the fee simple title (i.e. the registered landowner, or landlord) in two circumstances:

1. if the lien claimant gives notice under section 15 of the Act; or
2. if the landlord also qualifies as an “owner” as defined in section 1(g) of the Act (i.e. if the work was done at the landlord’s request, etc.).

Section 15 Notice
 
When the lien claimant is working for a tenant, he may want the ability to lien the landlord’s interest for additional security. The Act allows the contractor or material supplier to serve a notice upon the landlord and, if the landlord does not respond, the landlord cannot later object when its interest is liened. (Per section 15(1) of the Act: …”if the person doing the work or furnishing the material gives to the person holding the fee simple, or that person’s agent, notice in writing of the work to be done or materials to be furnished, the lien also attaches to the estate in fee simple unless the person holding that estate, or that person’s agent, within 5 days after the receipt of the notice, gives notice that the person holding that estate will not be responsible for the doing of the work or the furnishing of the materials.”)

Landlord Requesting Work Done For A Tenant
 
Quite often, however, the question of liening the landlord’s interest will not arise until much later when problems develop. If no statutory notice has been provided, or if the landlord objects to the statutory notice, the only way a landlord’s interest is subject to lien claims (in respect of work contracted by a tenant) is if the landlord falls within the definition of owner provided in the Builders’ Lien Act. Yes, it is possible that both landlord and tenant meet the statutory definition.

The critical question is usually whether the landlord expressly or impliedly requested the work. If the landlord was sufficiently involved in the construction effort, the lien claimant may have a right to lien the landlord’s interest. The case law is clear however that mere knowledge of the work (on the part of the landlord) is not enough to give the contractor a right to lien the landlord’s interest. Lighting World Ltd. v. Help-U-Build (Edmonton) Inc. is an example where the landlord occasionally visited the construction site to observe the ongoing work, and loaned money to the tenant for the purpose of the construction, but did not provide any direction to the contractor, and did not provide any direction to the tenant as to how the construction should be done; she was held not to be an owner and the lien claim was dismissed. In another case, the lease agreement bound the tenant to have certain specific renovations carried out. The plans for the renovations had to be submitted to the landlord for approval. The court nevertheless concluded that the landlord did not expressly or implied request the work. Generally, the courts do not allow a lien against a landlord’s interest in respect of work done for a tenant unless the landlord actively participates in the work, typically by directing either the contractor or the tenant regarding the work.

Practical Points 

In sum, a contractor working for a tenant has the right to lien the tenant’s lease, but this may be inadequate security for payment. The contractor working for a tenant does not automatically have the right to lien the landlord’s interest; it depends on the use of a section 15 notice or unusual involvement by the landlord in the tenant’s construction project.  The contractor concerned about security for payment may not want to rely exclusively on his lien rights in any event, but this may be a particular concern where work is performed for a tenant such that lien rights are limited.

And getting back to the lead point of this article, the contractor working for a tenant must be sure to identify the correct legal interest when registering a lien; specifying the landlord’s interest in the Statement of Lien, when the contractor only has lien rights against the tenant’s interest, results in a lien that can be declared invalid.

Compromising on Consequential Damages

Author: Corbin Devlin

The potential loss to the owner if something goes wrong during construction (e.g. business interruption, loss of production…) is often far greater than the cost of construction. Owners reasonably want to hold contractors accountable for delays or other events in the contractor’s control that may affect the owner’s bottom line. But contractors reasonably don’t want to take on a risk that greatly exceeds the value associated with a particular contract. For a time it was common to see broad exclusions of consequential damages in industrial construction contracts. Sophisticated contractors in Alberta were simply unwilling to accept a risk of the magnitude likely to be associated with the delay or shutdown of a revenue-generating asset.

Now the trend appears to be towards a more complex sharing or allocation of risk.

• Limitations (monetary caps) on consequential damages, rather than a complete exclusion of liability for consequential damages (alternatively, a cap on all possible damages arising from the contract).
• More elaborate definitions of risks that are or are not excluded (e.g. instead of an exclusion clause that simply refers to consequential or indirect damages, a more detailed listing of excluded damages such as losses caused by business interruption, loss of profits, loss of downstream contracts…)
• More exceptions to the exclusion (Contractors: beware of the clause that excludes liability for consequential damages, excepting any consequential damages that are foreseeable; ask yourself, is it foreseeable that a construction mishap could take down the existing plant for a period of time? If the answer is yes, then this exclusion clause does not protect against liability for the very significant losses associated with such an event!)
• More prevalent use of liquidated damages in industrial construction contracts (in place of consequential damages for delay, some form of liquidated damages may be payable, ideally in an amount sufficient to hold the contractor accountable but not so great as to present a risk of bankrupting the contractor).

Contract provisions excluding consequential damages are not all the same. Now more than ever, these clauses can be very narrow or very broad in scope and effect, and should be the subject of deliberate review and negotiation.

General Contractor vs. Construction Manager - What's In A Name

Author: Corbin Devlin

Very often, the difference between a general contractor (GC) and a construction manager (CM) is not what we believe it to be. The specific terms and conditions of the contract - not the titles (General Contract vs. Construction Management Agreement) – are what define the rights and obligations of the parties. In particular, construction management can be a very malleable concept.

CM Agreements Can Vary Greatly
 
First, the term "Construction Manager" embodies more than one contract model. In a more traditional CM Agreement, the CM is advisor to the owner, and often acts as the owner's agent; but the owner contracts with trades and suppliers. In contrast, there is the CM-at-risk model; a CM-at-risk takes on responsibility for construction, and contracts with trades and suppliers directly. It is often unclear from the document title alone whether a particular CM Agreement is one or the other. But these different CM arrangements are substantially different, both legally and practically speaking. In my view, a CM-at-risk relationship has more in common with a GC relationship than it does with a more traditional CM relationship.

Second, one CM Agreement can differ quite significantly from another. Pricing and payment structures, allocation of responsibilities, the procurement process, involvement in pre-construction, and most importantly responsibility for the design, work and schedule; all these components that define the relationship tend to vary not only between GC and CM relationships, but also from one CM relationship to the next. The CM role is one that lends itself to customization.

Assumptions Lead to Failures and Disputes
 
As a result, I have seen a number of owners, contractors – and particularly construction managers - making the mistake of assuming that roles, responsibilities and lines of communication are the same from one construction management relationship to the next. Sometimes it is a failure to recognize the distinction between a construction manager-at-risk and other CM arrangements. More often, it is a case of assuming that a new CM contract is basically the same as the one before. The fact is, there is a great variety of custom CM and GC contracts in use, and even "standard" contracts such as CCDC 5A and CCDC 5B* may vary widely once special conditions are incorporated. Such mistakes can often lead to legal disputes, as different perceptions regarding the CM's role can lead to tensions, and assumptions regarding the CM's role can lead to failures of coordination, supervision, scheduling and communication.

Read the Contract
 
At its' core, I guess this post is simply a reminder to read the contract. And… don't pay too much attention to the title of the contract document. Whether it is entitled General Contract or Construction Management Agreement (or something else altogether) is sometimes more misleading than helpful, as it can lead to incorrect assumptions regarding the relationship structure and contract obligations.

*CCDC 5A is an example of a more traditional CM Agreement; CCDC 5B is an example of a CM-at-Risk Agreement.

Indemnity Clause "Red Flags"

Author: Corbin Devlin

In most construction contracts, there is nothing more tricky than the indemnity clause. Indemnities don’t come into play on most projects (but when they do, it is because something has gone badly wrong.) As a result, indemnity clauses often get short shrift in negotiations.

A blog is no place for a discussion of such a complex subject. Or is it? Determining whether or not an indemnity clause is problematic is the starting point.

With the intent of giving a complex subject a simple treatment, this is my list of “red flag” issues that call for (re)negotiation of an indemnity clause:

• Indemnity for risks out of your control: This is a basic principle. The indemnitor (the party with the burden of the indemnity clause) should ask, am I taking on any risk under this indemnity clause that I cannot control? The purpose of indemnities is (or should be) to attach a particular risk to the party best able to control that risk.
• Indemnity for risks controlled by the other party: This is worse. Unless you are in the insurance business, you should not agree to indemnify the other contracting party for something in their control.
• Indemnity for losses resulting from the other party’s own negligence: This is the absolute worst. (Fortunately, this is also a very rare animal. And the Canadian courts say that they won’t imply an obligation to indemnify the other party for a loss caused by their negligence unless the contract says so in the most clear and obvious language. I have seen such express clauses, but not many.)
• Indemnity for an uninsured (or uninsurable) risk: This is another basic principle. The indemnitor should always be asking, do I have insurance that protects me against these risks covered by the indemnity clause?
• Indemnity without limit: Is there no cap on the indemnity obligation? Remember that insurance policies have monetary caps; an indemnity without a cap is a sure sign that the indemnitor are taking on an uninsured risk (i.e. in excess of policy limits).
• Indemnity disproportionate to the contract: Is the indemintor taking on risk under the indemnity clause that is far greater than the contract value? Would the indemnity clause put the company at risk of bankruptcy if the unexpected comes to pass?
• Indemnity for consequential damages or economic loss: Indemnity clauses broad enough to include consequential damages or economic loss require very careful consideration. By definition, such indemnity clauses expose the indemnitor to liability that is broader than ordinary principles of contract law or common law would allow. (Perhaps another day I will elaborate; this is a topic that warrants an article of its’ own.)
• Indemnity for negligence or breach of contract: Now we are getting into clauses that are common, but require caution. Indemnity clauses that cover negligence or breach of contract expose the indemnitor to potential liability for unforeseeable losses. But at least such obligations require the indemnitee to prove that the indemnitor was negligent, or breached the contract. If the indemnitor has to give such an indemnity, the other “red flags” mentioned in this list become even more important; e.g. If you must agree to indemnify the other party for any loss resulting from your breach of contract, can you negotiate a monetary cap, and/or an exclusion of consequential damages or economic loss?
• Indemnity for any loss “arising from or related to” the work: Such broad indemnity obligations do not depend on proof of negligence, or breach of contract – it may be sufficient to trigger indemnity obligations if the loss is (somehow) related to the work, even without negligence or breach of contract. Therefore, such indemnities require even more caution than indemnities for negligence or breach of contract. Once again, however, such indemnity clauses may be fine – if they are otherwise subject to some reasonable limitations in scope and amount.

There are infinite permutations of project risks, indemnity provisions, and insurance programs; an indemnity clause may be unreasonable in once case but justifiable, even necessary, in another case. Be sure to consider the indemnity clause in the context of possible real world risks on the project (bodily injury, damage to existing facilities, delay in completion, environmental risk…) and the project insurance program. Just don’t ignore the indemnity clause or treat it as boilerplate. A bad indemnity clause can be a very big problem, not only when that unexpected loss occurs but also in the event of any contract dispute.

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.