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.

Keeping Construction and Tendering Contracts Separate

Author: Corbin Devlin 

Tender documents are often "living" documents. A problem arising on one project prompts a construction owner to insert a new contract term to address the problem on subsequent projects. This is good practice in itself, a sort of continuous improvement process. But a common result of this process is that contract terms are put in the wrong place. In particular, there is a recurring problem with tender documents that intersperse construction terms with proper tendering terms. For example, it is common to see conditions such as "Contractor will use only materials ABC in performing the Work" or "Installation by XYZ certified installers" right in the invitation to tender. These terms and conditions belong in the construction agreement, not in the invitation to tender.

What's the difference where these terms are placed? Isn't the invitation to tender incorporated by reference into the construction agreement anyhow?

The legal problem is that the invitation to tender (Contract A) creates a binding agreement between each bidder and the construction owner. Each bidder (and the construction owner) has a contractual obligation to respect the terms of the invitation to tender – and a contractual right to enforce the terms of the invitation to tender. On the other hand, the construction agreement (Contract B) is binding on only one bidder - the successful bidder - and construction owner. The terms that should bind each and every bidder are terms such as “Bids submitted later than 4 p.m. on closing date will be rejected.” But the owner only requires the successful bidder – not each bidder - to actually perform the work. So it is only the successful bidder that requires to comply with construction specifications such as, for example, "only materials ABC to be used in construction" or "materials to be installed by XYZ certified installers."

What is the harm in binding all bidders to such terms? After all, the owner wants to ensure that all bidders are bidding on the same thing. Frankly, the harm is that this practice causes lawsuits. A few years ago the Double N Earthmovers case (Double N Earthmovers Ltd. v. Edmonton (City of), 2005 ABCA 104) went all the way to the Supreme Court of Canada because of a related problem. The City of Edmonton prescribed certain equipment specifications for the work – and this requirement was found in the tender documents. One of the unsuccessful bidders sued when the City ultimately entered a construction agreement that allowed for different equipment specifications. The City was held not liable. But if the equipment specifications were not embedded in Contract A (the invitation to tender), but instead placed in Contract B where they belong, then this lawsuit might have been avoided.

I'm writing this article because the Double N case does not illustrate an isolated incident. I have seen numerous disputes that could have been avoided but for the confusion caused by construction agreement terms embedded in tendering documents. The owner who specifies "XYZ certified installers" probably does not contemplate that an unsuccessful bidder might have the right to enforce this specification. But placing that specification in the invitation to tender may have that effect.

Of course, the fix to this problem is relatively simple. As mentioned, the proper place for construction terms and conditions is in the construction agreement. Something like the requirement to provide “XYZ certified installers" should be located in the scope of work appendix. The proposed construction agreement, or maybe (depending on circumstances) just the scope of work appendix, should be an attachment to the invitation to tender. The invitation to tender should specify that the successful bidder will enter a contract on the attached terms and conditions, or for the attached scope of work. And the invitation to tender should expressly reserve the owner’s right to negotiate the construction agreement terms with the successful bidder.

Top 3 Ways Project Documentation Fails

Author: Corbin Devlin 

Documentation is key to resolving construction disputes. Was there a change in site conditions? What instructions were given on site? Was a change approved? Was the owner given notice?  This is just a small sample of the issues that come into dispute – and that depend on proper documentation to resolve. Here’s the top 3 reasons project documentation fails:

1. No documentation habit: Construction companies – and construction owners - have personalities just like people do. It still surprises me when small companies have excellent documentation habits, and large companies have weak documentation habits. But I have learned it is not a question of financial resources; it is a question of human resources. Personnel well-educated regarding construction disputes – and in particular personnel who have lived through a number of disputes – come to learn the importance of documentation, and how to properly document a project, event or dispute.
2. No systems: Not all personnel involved in a project are going to have the aforementioned training and experience. So it is key to have systems in place to ensure that documentation is maintained, even by those who may not understand the reasons for it, and even when there is no dispute in sight. Many sophisticated construction contractors and owners have excellent (albeit complex) management systems in place. Remarkably, some don’t. But even smaller or less sophisticated contractors and owners can implement good systems; e.g. designating who is responsible for what project documentation, setting standards for documenting site conditions and events, and recording (and retaining) all project communications.
3. Not reading the contract: No documentation habit or system is going to save the owner or contractor who does not read or understand the contract requirements. One of the best practices I recommend is to ensure that key personnel (e.g. project managers and superintendents) create a summary of every significant contract – in other words, reduce the contract to a page or two of bullet-points. This ensures that key personnel actually read the contract, and provides a useful reference throughout the project. Notice requirements and timelines should be a highlight of any such contract summary.

Sometimes there is no documentation of a disputed event. This puts the parties on a level playing field. But it is far more challenging to resolve disputes without documentation; if it comes down to “he said, she said,” then outcomes may be unpredictable. Sometimes both parties have excellent documentation. In such cases disputes are more likely to come down to technical issues or issues of contract interpretation – they can still be contentious, but much easier to resolve. Sometimes one party has excellent documentation and the other has none. This tilts the playing field. Don’t lose the war of documentation.