Tuesday, 20 February 2018

Supreme Court of Canada Releases Decision on Labour and Material Bonds

Author: Will Johnston

The Supreme Court of Canada released a decision last Thursday (Valard Construction Ltd. v. Bird Construction Company) which imposes a new obligation on an owner or general contractor of a construction project who requires a Labour and Material Payment Bond (“L&M bond”) to take reasonable steps to proactively inform claimants of the existence of the L&M bond. Failure to take reasonable steps exposes the “trustee” of the L&M bond to claims of breach of fiduciary duty and damages if an unpaid subcontractor or material supplier loses their rights to advance a bond claim because they do not know of the L&M bond’s existence. Prior to this decision, the trustees named in an L&M bond would only be liable if they failed to disclose the existence of the bond when asked.
 
L&M bonds are typically used on large construction projects, especially for public infrastructure projects, but they are only mandatory if required by contract. The person who requires the contractor below them to obtain an L&M bond will be named in the L&M bond as the “trustee”. The trustee will almost invariably be either the project owner or the general contractor. A typical L&M bond provided by a subcontractor to a general contractor, includes language that creates a trust:
"The Principal (subcontractor) and the Surety (bonding company), hereby jointly and severally agree with the Obligee (general contractor) as Trustee, that every Claimant (sub-subcontractor or material supplier) who has not been paid … within 90 days … may sue on this Bond" 
 
Their purpose is to reduce the risk of disruptions from issues such as lien claims, procurement disruptions and work stoppages which can occur when lower level suppliers and subcontractors are not paid. The Supreme Court recognized that the security provided by an L&M bond is beneficial to an owner or general contractor even though they do not receive payment from the L&M bond themselves. This non-monetary benefit to the owner or general contractor was the underlying reason to justify imposing a duty on them as trustees to take “reasonable steps” to inform potential claimants of the L&M bond’s existence.  
 
The Supreme Court expressly states that not every failure to proactively inform potential claimants of the L&M bond will result in liability. The trustee only needs to take “reasonable steps” to inform potential claimants meaning that the underlying circumstances must be considered before a court can conclude whether a breach of the duty to inform has occurred. In this case,  Bird Construction Ltd. could have met their obligation by posting a copy of the L&M bond in its on-site trailer where they held daily toolbox meetings. “This would have provided a significant portion of potential beneficiaries with notice of the bond’s existence. The cost of doing so would have been negligible to Bird …” (at para 28). Another factor that motivated the Supreme Court to hold Bird Construction Ltd. liable was evidence that an L&M bond for this particular type of project was uncommon. Because of this, the trustee (Bird) should have anticipated that potential claimants would not be aware of the L&M bond’s existence and, in the Supreme Court’s view, the reasonable steps taken by a trustee under the circumstances would include proactively posting the L&M bond in the worksite trailer.  
 
This decision creates a great deal of uncertainty for owners and general contractors named as trustees in L&M bonds. The dissenting judgment expresses concern that trustees have little to no guidance as to how they can meet their duty to inform bond claimants given the wide range of factual circumstances. For example, how will the court determine which projects commonly have L&M bonds and which projects do not? What duties to inform should a trustee have to material suppliers who will not receive notice of the L&M bond if it is posted at the worksite?
 
Until future cases considering a broader range of factual circumstances are decided, the magnitude of risk now facing owners and general contractors cannot be predicted. At this time we can only describe the two extremes of a continuum. At one extreme we know that failing to take any steps whatsoever to inform potential claimants that an L&M bond exists on a project will not be acceptable. Conversely, we know that this new duty does not require absolutely every potential bond claimant to be sought out and informed of the L&M bond.  The extent of a trustees duty to inform will now fall somewhere between these two ends of the spectrum. The extent of the obligation will depend on the unique circumstances of each project such as the options available to give notice and the costs of doing so.  Future cases will likely consider whether a trustee must make additional efforts, beyond basic steps such as posting the L&M bond onsite, if the trustee is aware that their bonded subcontractor is facing financial difficulties and some bond claimants could lose their security.
 
This post is a follow-up to an earlier Blog Post, "Labour and Material Bond Claimants May Gain Further Rights".  

Thursday, 18 January 2018

Progressive Holdback Tricks and Traps


There are a few tricks and traps associated with the progressive release of builders’ lien holdbacks.  As mentioned in a prior article, the Alberta Builders’ Lien Act includes provisions for releasing the statutory holdback early, or in stages ("progressively"), which can be very important to promote cash flow on larger construction projects. In the simplest terms, a Certificate of Substantial Performance may be used to authorize the release of part of the holdback – that is, the holdback in relation to the value of work referenced in the Certificate – even though the overall project is not yet entirely complete.

Basic Principles

As a starting point, the Builders’ Lien Act requires the owner to retain a 10% lien holdback throughout construction.  On large projects, this can result in a significant drag on cash flow to the contractor and subcontractors.  In particular, subcontracts often provide that payment of the subcontractor’s holdback is not due until the general contractor receives corresponding payment from the owner.   This can result in a subcontractor waiting an extended time to receive its holdback.  The progressive release of holdback mechanism exists to remedy this problem.

Importantly, either the general contractor or a subcontractor can post a Certificate of Substantial Performance in respect of the work of the subcontractor.  This gives the subcontractor a measure of control over the timing of release of holdback by the project owner.  It also provides a means by which the overall holdback on the project can be reduced in several stages, as various subcontracts are completed.  If a Certificate is properly posted, and no liens are registered, the project owner may safely release the portion of the statutory holdback associated with the Certificate 46 days after the Certificate is posted. 

Basic Example

Consider for example a construction project that is expected to extend over two full years.  A subcontractor who does all his work in year one does not want to wait another year to receive his portion of the owner’s builders lien holdback.  So, the Act permits the general contractor or the subcontractor to post a Certificate when the subcontractor’s work is substantially performed.   Assuming no liens are registered, the owner can safely release the portion of the holdback attributable to that subcontractor 46 days after the Certificate was posted. 

On a $10M general contract, the holdback at the end of the project would be $1M if not for progressive release of holdback provisions.  But the progressive release of holdback by the owner in relation to the early completion of a $500k subcontract would reduce the statutory holdback by $50k (i.e. 10% of the subcontract value), such that the owner’s statutory holdback is reduced to $950k at the end of the project.  The owner retains the holdback to comply with the Builders’ Lien Act, but also to protect itself against insolvency or default by any contractor on the project.  In our example, assuming the owner has complied with the legislation in progressively releasing $50k upon completion of the subcontract, the owner’s liability for the holdback is reduced from $1M to $950k.

Permissive vs. Mandatory

One thing to keep in mind is that the Builders’ Lien Act permits the progressive release of holdback; it does not require it.  General contractors and subcontractors who want to be able to insist on progressive release of holdback by the owner must ensure there are contract provisions that require the owner to progressively release the holdback.  For example:

When 45 days have expired from the date of issue of the certificate of substantial performance in respect of that Subcontractor’s subcontract, as verified by the Consultant, and no builders’ liens have been registered for the Work, the Owner shall promptly release that Subcontractor’s portion of the major lien fund to the Contractor.  If no builders’ liens have been registered for the Work, the Contractor shall promptly release that portion of the major lien fund to that Subcontractor. (Canadian Construction Association, CCDC 2 (2008) Supplementary General Conditions for use only in the Province of Alberta)

Subcontractors might want to ensure that progressive release of holdback provisions are included in both their subcontract and the general contract; an omission of such provisions from either contract could prevent the subcontractor from insisting on the progressive release of holdback.  (Sub-subcontractors should ensure that such provisions are included in the general contract and every subcontract in the chain.)


Other Tricks and Traps

As always, owners must minimize their risk of liability under the Builders’ Lien Act by ensuring that the subcontractor or general contractor has complied with statutory requirements, before making a progressive release of holdback.  Many contracts are structured to include administrative requirements that mirror the statutory requirements, thereby protecting the owner who follows his contract.  Other contracts do not get into such detail regarding conditions for payment.  Above all, and in any event, the owner should check title to the project lands, to ensure no lien claims have been registered (for claims arising under the general contract in question) before making any payment on the contract, for progressive release of holdback or otherwise.

Finally, it is important to note that the legislation only contemplates the progressive release of holdback upon the substantial completion of an entire contract or subcontract.   It is not consistent with the legislation, and may expose the owner to financial risk, to progressively release holdback month-to-month, or in association with the completion of a phase of work that does not comprise an entire contract or subcontract.  I have seen a number of circumstances where the concept of progressive release of holdback is misunderstood, sometimes even set out by contract in a way that does not comply with the statute, resulting in significant financial risk to the owner (i.e. potential shortfall in the statutory holdback).

Properly accounting for multiple progressive releases of holdback can be challenging under any contract.  Experienced contract administrators and project managers are familiar with these challenges.  But we know from experience that administration of progressive releases is not straightforward, and errors can happen through inadvertence or inexperience.

Thursday, 2 November 2017

Statutory Remedies in Construction Disputes

Author: Graham Henderson
 
In the construction industry, insolvency is a regular occurrence that often leaves innocent companies unpaid for their goods and services. Insolvency also sometimes has a domino effect leading to the non-payment of multiple contractors and suppliers.
There are remedies available to companies to protect themselves from being affected by others’ insolvencies; however, those remedies typically have strict deadlines that cannot be missed. Companies often contact legal counsel after the deadlines have passed, missing opportunities to protect themselves.
The following chart provides a summary of the most prevalent statutory remedies available to companies involved in construction disputes:



 

Remedy

Companies Eligible for Remedy

Deadline

1.

Builders’ Lien

(Builders’ Lien Act, s. 6)

A company that provided materials or services for an improvement to land.

The company must register the lien within 45 days from the last day that materials or services were provided (90 days for improvements to oil or gas wells).

2.

Vendor’s Lien

(Builders’ Lien Act, s. 17)

A company that delivered materials for use in an improvement to  land, but whose materials have not yet been incorporated into the project.

The Vendor’s Lien expires as soon as the materials are incorporated into the improvement.

3.

Possessory Lien

(Possessory Liens Act, s. 2)

A company that expended money, labour or skill on a person’s movable property (e.g. objects and equipment, but not land), and in doing so enhanced the value of that property.

The Possessory Lien expires as soon as the property is no longer in the company’s possession.

4.

Unpaid Seller’s Lien

(Sale of Goods Act, s. 40)

A company that has sold goods but is still in possession of those goods.

The Unpaid Seller’s Lien expires as soon as the goods are no longer in the company’s possession.

5.

Public Works Claim

(Public Works Act, s. 14)

A company that provided materials or services for an Alberta government public works project.

For work on a roadway: The company must deliver a notice of claim between 30 to 90 days after the last day that materials or services were provided.

For any other work: The company must deliver a notice of claim within 45 days from the last day that materials or services were provided.

6.

Thirty Day Goods Claim

(Bankruptcy and Insolvency Act, s. 81.1)

A company that delivered goods to a purchaser that is now bankrupt. The goods must have been delivered within 30 days before the date of bankruptcy.

The company must deliver a written demand within 15 days from the date of the bankruptcy.

7.

Garage Keeper’s Lien

(Garage Keepers’ Lien Act, s. 2)

A company (known as the “Garage Keeper”) that stored or repaired a motor vehicle (including heavy-duty vehicles).

The Garage Keeper’s Lien expires as soon as the vehicle is returned to its owner, unless the Garage Keeper obtained a signed acknowledgment of indebtedness.

Further, in most cases, the Garage Keeper’s Lien must be registered within 21 days after the vehicle is returned to the owner (occasionally, earlier registration may be required).

There are many nuances to the statutory remedies and deadlines listed above. It is important for companies to be aware of the remedies and to contact legal counsel as soon as possible if they believe that one of the remedies may be applicable to their situation.
If you, or someone at your company, would like more information regarding your statutory remedies, feel free to contact any of the lawyers in our construction group.

Tuesday, 18 July 2017

Are Engineering Services Lienable?

Author: Corbin Devlin

Not every person who performs a service in relation to a construction project is entitled to a builders’ lien. Architecture and engineering services frequently give rise to questions about lien rights and holdback requirements. 

It Depends…
Architecture and engineering services give rise to a lien under the Alberta Builders’ Lien Act if those services relate to an “improvement” to land. So, a professional firm is entitled to register a lien for preparing construction drawings. But an architect or engineer providing services with respect to rezoning, subdivision and other development issues does not have lien rights; such services are considered to be not sufficiently connected to the process of construction. Several cases indicate that conceptual or schematic design work is also considered too far removed from the construction process to support a lien.

Some of the reported cases on this issue appear inconsistent, because the nature of engineering services varies project-to-project, and there is frequently some blending of services relating to development and services relating to construction.  The courts struggle sometimes to determine where to draw the line.

If a professional firm is entitled to a builders’ lien, the owner has a corresponding obligation to retain the statutory holdback in relation to the lienable scope of work.

Building Permits and Environmental Approvals
Master Robertson, Q.C. provides an excellent summary of the case law on this issue in J.K. Engineering Ltd v Red Quest Developments Ltd.

In that case, the landowner applied to court to strike out a lien registered by an engineering firm. In particular, the court considered work performed by J.K. Engineering to assist the landowner with obtaining approval of the storm drainage system from Alberta Environment. The necessary approval was not granted by Alberta Environment, giving rise to the payment dispute between the engineering firm and the landowner. The landowner argued that the lien was invalid because this environmental approval work was not directly related to the construction work. The Master compared this work with the work typically required for a builder to obtain a building permit, and concluded that the nature of such work is sufficiently connected to the process of construction to support a builders’ lien. The lien was valid. (However, it is important to note that construction of the development was well underway when J.K. Engineering’s approvals-related work was done. Also, J.K. Engineering was concurrently providing other design and construction services. It seems entirely possible the court would have come to a different conclusion if the environmental approval work stood alone.) This case illustrates the fine line that exists between a valid lien and an invalid lien.

Monday, 20 March 2017

Labour and Material Bond Claimants May Gain Further Rights

Author: Will Johnston


In Canada, the law imposes an obligation upon owners and general contractors named as “trustee” in a labour and material payment bond (“L&M bond”) to provide a copy of the L&M bond upon request by a potential claimant. The Supreme Court of Canada has granted leave to appeal where they will decide whether a trustee named in an L&M bond must proactively inform potential claimants of the existence of the L&M bond failing which they can be held liable to claimants who unwittingly lose their right to claim under the bond. The decision being appealed to the Supreme Court of Canada is from the Alberta Court of Appeal in Valard Construction Ltd v Bird Construction Company.

A conventional trust imposes onerous obligations upon trustees to act in the best interests of the trust beneficiaries. A typical L&M bond provided by a subcontractor to a general contractor includes language suggesting a trust:
"The Principal (subcontractor) and the Surety (bonding company), hereby jointly and severally agree with the Obligee (general contractor) as Trustee, that every Claimant (sub-subcontractor) who has not been paid … within 90 days … may sue on this Bond"
The Alberta Court of Appeal was divided as to whether an L&M bond creates a conventional trust and therefore divided as to the extent of the duties owed by a “trustee” under an L&M bond.

The Trial Judge and a majority in the Alberta Court of Appeal held that an L&M bond creates a limited trust. Therefore, a trustee named in an L&M bond does not have an obligation to proactively inform potential claimants of the bond’s existence. The majority was unwilling to impose the usual onerous obligations that exist in a conventional trust context upon an L&M bond trustee.

Justice Wakeling of the Alberta Court of Appeal wrote a lengthy dissent. In his opinion, the wording in a typical L&M bond creates a conventional trust thereby imposing the usual obligations on the trustee to advance the interests of the beneficiaries (i.e. potential bond claimants). He concluded that Bird Construction Company, as trustee, was liable to the sub-subcontractor, Valard Construction Ltd. for failing notify potential claimants of the bond’s existence by posting the L&M bond in a conspicuous place at the workplace.

Until the Supreme Court of Canada renders their decision, the law in Alberta does not require a general contractor to post a bond or to actively inform potential claimants that a bond exists. However a general contractor must disclose the existence of an L&M bond and provide a copy when requested by a potential claimant. We will report in a future blog post if the Supreme Court chooses to reverse the decision of the Court of Appeal.

Thursday, 9 February 2017

Fair Warning to Contractors – The Fair Trading Act’s Requirements Apply to Construction Contracts

Author: Sarah Levine

The recent Provincial Court of Alberta decision, R. v. 1587915 Alberta Inc. (“1587915”), is a stark reminder of the Alberta Fair Trading Act’s (the “FTA”) application to construction contracts, particularly for home renovations, and the potentially serious ramifications for contractors who deviate from the technical requirements of fair practice and compliance under the FTA. Not only can corporations be found guilty of contraventions of the FTA, but their directors can also be found guilty of the offence if they authorize the impugned conduct, whether or not the corporation has been prosecuted for the offence.

The Facts
1587915 involves 31 charges under the FTA and its Regulations against 1587915 Alberta Inc. and its directors, Kieron and Greta Warren. Kieron Warren (“Warren”) was also charged with four counts under the Criminal Code- two counts of fraud (under section 380(1)(b)) and two counts of theft (section 334(b)).

The 31 charges under the FTA and Regulations arose in respect of 6 families that 1587915 contracted with to provide home renovations. The charges against 1587915, Kieron and Greta Warren were as follows:

Six Counts   Section 104(1) FTA: No person may engage in a designated business unless the person holds a licence under this Act that authorizes the person to engage in that business;

Six Counts   Section 10(2)(a) of the Prepaid Contracting Business Licensing Regulation AR 185/99. A person who is engaged in a prepaid contracting business must ensure that every prepaid contract the person enters into complies with the requirements of section 35 of the Act;

Six Counts   Section 31(2) FTA: Within 15 days after a direct sales contract is cancelled, the supplier must refund to the consumer all money paid by the consumer and return to the consumer’s premises any trade-in or an amount equal to the trade-in allowance;

Six Counts   Section 6(4)(a) FTA: It is an unfair trade practice for a supplier to do or say anything that might reasonably deceive or mislead a customer.

Six Counts   Section 6(4)(n) FTA: It is an unfair trade practice for a supplier to represent that goods or services will be supplied within a stated period if the supplier knows or ought to know that they will not.

One Count   Section 10(3) Prepaid Contracting Business Licensing Regulation AR 185/99: A person who is engaged in the prepaid contracting business and who enters into a prepaid contract with a buyer must provide a copy of the signed contract to the buyer.

A prepaid contracting business is a business designated as such by the Designation of Trades and Businesses Regulation. These businesses include contracts for construction, maintenance or renovation where, critically, the prepaid contractor solicits, negotiates or concludes construction or maintenance contracts in person at any place other than their place of business and accepts money before all the work is done and/or the services are provided. Such operations require a license in order to engage in the prepaid contracting business. A direct sales contract is a consumer transaction where the consideration for the goods or services exceeds $25 and is negotiated or concluded in person at a place other than the supplier’s place of business or at a place other than a market place, auction, trade fair, agricultural fair or exhibition.

Behaviour in Breach of the FTA and Regulations
The six contracts from which the charges arose are variations on the same theme. In each of the contracts, references were made to completion deadlines and payment due dates. In each case, the families expressed concern that insufficient progress had been made by the dates when the contractor demanded more money. When the issue arose, as it did in each case, Warren referred back to the contract showing that the due dates of payments were clearly stated and were not related to progress.

In each of the six project situations, much the same pattern of conduct followed: after execution of the contract and the first payment, demolition began and generally proceeded. After demolition, customer complaints were made by all families regarding: lack of workers, lack of workers with appropriate skills, periods of inactivity and difficulty in reaching Warren. When meetings were held with Warren, he stated that the customers were late in making progress payments and in breach of the contract. Evidence was heard that additional contractors were called in by customers, and their explanation for engaging additional contractors was nonattendance by the contractor and lack of progress on their project.

Following a consideration of the evidence given by the parties, the Court found that 1587915, Kieron and Greta Warren were guilty of engaging in a prepaid contract without a license for all six contracts; 1587915 and Warren were guilty of failing to comply with the prepaid contract requirements; and that 1587915 and Warren were guilty of failing to refund money to their customers following the cancellation of a prepaid contract.

The Court did not find 1587915, Kieron or Greta Warren guilty of doing or saying anything to mislead a customer with respect to one of the contracts, but did find either 1587915 or Warren, or both, guilty of this charge with respect to the five other contracts. Similarly, 1587915, Kieron and Greta Warren were not found guilty of promising to supply goods with the knowledge that they would not be able to with respect to the first contract. However, 1587915 or Warren, or both, were found guilty of this charge with respect to the other five contracts. Lastly, the Court did not find Warren guilty of any of the four criminal charges of theft or fraud with respect to the home renovation contracts he entered into.

Tips and Takeaways
While Warren’s behaviour was particularly egregious, the moral of the story is to bear in mind the swath of technical requirements for licensing, entering into contracts, and otherwise engaging in certain business practices in accordance with the FTA and its Regulations.

The technical requirements of the FTA and its Regulations are not to be taken lightly when prepaid contractors and/or direct selling businesses contract with customers for construction services. The purpose of this legislation is ultimately to protect consumers from unfair business practices, ranging from misrepresentation and misleading customers to operating without proper licensing. As is evident from this case, the Courts will vigorously uphold this mandate in the interests of protecting the public, which can be to the detriment of contractors if they do not take care to comply with the FTA and its requirements.

Wednesday, 25 January 2017

Construction Holdback Requirements – Not for Dummies

Authors: Corbin Devlin and Kathleen Garbutt

Statutory construction holdback requirements can be remarkably tricky to interpret, presenting challenges for both novice and experienced players in the construction industry.

It is important to note that holdback requirements under the Alberta Builders’ Lien Act apply to projects of any size, from major industrial facilities to home renovations. In some sectors, particularly residential construction, holdback requirements are frequently misunderstood (to the considerable peril of the homeowner, who is often inexperienced regarding holdbacks and liens). In other sectors, particularly some professional design services and material suppliers, holdbacks are intentionally avoided, even if the Builders’ Lien Act is applicable.

On the other hand, there are all kinds of projects and lands exempt from builders’ liens – and therefore exempt from the corresponding holdback requirements. Most of the exemptions relate to projects of a “public” nature. Public highways and lands owned by irrigation districts are exempt. Interests in land owned by the federal or provincial governments are exempt. But not all infrastructure projects or projects with government involvement are exempt. For example, municipalities are not generally exempt - although particular municipal projects or lands may fall within another exemption.

Statutory holdback requirements are the responsibility of the owner, not the contractor or subcontractors or suppliers. However, statutory requirements are often supplemented by contractual holdback requirements. That is, contractors and subcontractors may also be responsible for holdbacks under their contracts and subcontracts, and sometimes construction managers are contractually responsible for taking care of statutory holdback requirements on behalf of construction owners. In Alberta, it is against the law to make a contract to the effect that the Builders’ Lien Act does not apply, but there is no problem with a contract that supplements the statutory requirements.

As a general rule, the statutory holdback requirement is 10% of the value of the work actually done. In practice, this typically means that the owner deducts 10% from invoiced amounts. In some provinces, the holdback has to be placed into a separate account, but in Alberta the owner simply keeps the holdback in pocket. After the work is complete, the owner must then wait 45 days before releasing the holdback, or 90 days if the work relates to an oil or gas well. The prudent construction owner (or lender) will always check the title to make sure no liens have been registered prior to releasing payment of the holdback. And if any liens have been registered, the prudent owner will make arrangements for discharge of those liens before making any further payments.

There are provisions for releasing the holdback early, or in stages (“progressively”) which can be very important on larger construction projects. In the simplest terms, a Certificate of Substantial Performance may be used to authorize the release of part of the holdback – that is, the holdback in relation to the value of work performed before the Certificate is posted – even though the work is not yet entirely complete. (The tricks and traps associated with the progressive release of holdbacks is a subject for a future article.)

Most importantly, why does the statute impose a holdback requirement? The underlying purpose is to provide a fund to protect subcontractors and suppliers in the event of insolvency or payment default by others involved in the project. In practical terms, the construction owner must abide by the holdback requirements, or face the risk of making double payment (i.e. coming up with the money to pay subcontractors and suppliers out of the owner’s own pocket if there is no holdback).

Holdbacks are a big consideration for construction owners and builders alike in terms of construction financing, cash flow, payment security, and just plain old contract administration. Contact us if you require more information regarding your holdback rights and obligations.