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.

Tuesday, 3 January 2017

Lien Pitfall – Transfers of Land

Author: Corbin Devlin

When a transfer of title takes place, it is possible that builders’ lien claimants automatically lose their builders’ lien rights. This is another Builders’ Lien Act trap for the unwary.

If a lien is registered before the transfer of land, it will survive the transfer. (Or more likely, the transfer will be delayed until the lien is discharged.) However, if the transfer of land occurs after lien rights arise, but before the contractor or supplier registers a lien, then lien rights are at risk. That is because only a statutory “owner” is subject to lien claims. If the purchaser did not request the work to be performed or materials to be supplied and was not otherwise an active participant in the construction project, then the purchaser is not an “owner” within the statutory definition.

Example 1 – Residential Construction
By way of an example, a residential home purchaser had an agreement with the developer that he would construct and deliver the home to them. The developer owned the land in question and contracted to have the home built. When the home was completed, title was immediately transferred to the purchaser. The builder did not get paid by the developer and registered a builders’ lien. Notwithstanding the fact that the lien was registered in time, the court declared the lien to be invalid. The purchaser was not an “owner” (as that term is defined in the Act). The builder still had a right to sue the developer for payment, but the builder had no lien rights.


The Test – Statutory Definition of “Owner”
In the Builders’ Lien Act, the following definition applies:

…“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 person claiming under him whose rights are acquired after the commencement of the work or the furnishing of the material…
This definition, like much of the Builders’ Lien Act, is badly in need of translation into simple English.

Whether or not someone with an interest in land meets this antiquated statutory definition of “owner” will almost always fall to be determined on the question whether they expressly or impliedly requested the work. That is, were they active participants in the construction project? In the example above, the purchaser simply contracted to buy a completed house, and there was no evidence that (for example) they directed any changes during construction, so the court concluded that they were not sufficiently involved in the construction project to meet the statutory definition; simply speaking, they did not request the work.

Example 2 – Commercial Construction
This issue seems to come up most often in new home construction, but it can occur on any construction project. In our second example, a commercial contractor registered its lien on time, but not before the land had been transferred to a purchaser. The purchaser approved the specifications for the building, made requests (through the vendor) for changes during construction, and had a representative on the construction site from time to time. But the court held this was still insufficient to meet the statutory definition of “owner.” Where the party with an interest in the land (i.e. the purchaser) is not a party to the construction contract(s), it must be shown that they otherwise “actively participated” in the construction process so as to meet the statutory definition of “owner.”


Practical Tip
The practical consequence is that contractors, subcontractors and suppliers must be aware of any situation where the interest in land they are working on is likely to be sold or otherwise transferred. If a developer transfers title during construction or immediately after completion – to a purchaser who isn’t actively involved in the construction process - unregistered builders’ lien rights are lost. In appropriate circumstances, this might mean that it is desirable to register a lien before the transfer takes place, in which case the lien survives the transfer. Since this will usually have the effect of holding up the transfer completely, this should be done only after giving due consideration to the consequences. In other circumstances, this might mean it is prudent to seek other forms of security for payment at the outset

Monday, 17 October 2016

Five Reasons to Read the Dispute Resolution Clause in Your Construction Contract

Author: Corbin Devlin

Dispute resolution clauses are rarely the subject of negotiation. In my view, they are badly overlooked. Assuming that the construction contract in front of you proposes arbitration, what are some of the most basic, potential issues of concern?

Proceedings in a Distant Land

If your place of business is in Nisku, Alberta, do you want to have to travel to London, England or Abu Dhabi to resolve a payment dispute, because that’s where the contract says arbitration must take place?

The Other Guy Gets to Choose
The unilateral right to appoint the decision maker is a tremendous advantage in any dispute resolution process. This is rare but not unheardof. Don’t ever agree to such a clause.

A Slow Arbitration Process
One of the key advantages to arbitration over litigation is the prospect of a quicker resolution. While this is usually true, some arbitration processes are not speedy at all. I was recently involved in an arbitration process that required four months of procedural steps prior to even appointing the arbitrator. If the dispute resolution process involves multiple steps, and each step is mandatory, and each step has a timeline associated with it, add up those steps and timelines to see if you can tolerate how long it might take to get to a decision. Some arbitration processes are almost as slow as litigation, and even more costly.

Unreasonable Timelines
A competing consideration is the reasonableness of the timelines. That is, timelines that are too short can also be problematic. In particular, avoid unreasonably short timelines for giving notice of a claim or dispute.

No Rules
Many dispute resolution clauses do not contain any rules for the process. For example:
  • Will there be one arbitrator or three?
  • What is the process for selecting the arbitrator(s)?
  • Will there be questioning?
  • Document disclosure?
  • A full blown oral hearing with live witnesses?
  • What are the rules of evidence?
  • What are the timelines?
These rules matter greatly, in terms of how quick/fair, efficient/robust, simple/costly the process will be. If there are no rules prescribed, then be warned: there will be extra time and cost involved to negotiate and/or have the adjudicator establish the rules. 
Rules of arbitration are sometimes set out in the contract (or a schedule), but more often they are incorporated by reference. For example, a contract might simply make reference to the rules of dispute resolution published by an organization such as the Canadian Construction Documents Committee, the ADR Institute of Canada or the International Centre for Dispute Resolution. These rules vary significantly; all have pros and cons, and one set of rules might be perfect for one contract but wrong for another. The choice of rules deserves some advance thought. In my view, at the simplest, it is better to have any fair set of rules than to mandate arbitration without any rules at all. (Note: A clause that merely says arbitration will take place “in accordance with the Arbitration Act of Alberta” or something similar is still an arbitration clause without rules; the Arbitration Act deals with jurisdiction and rights of appeal… it does not set out rules for the arbitration process.)

Many Other Factors
There are a lot of other considerations that may be pros or cons depending on your perspective. Is the process final and binding? Is arbitration mandatory, or does the dispute go to arbitration only “if” the parties agree? Is non-binding mediation (and/or a progressive negotiation process) required, before the start of binding arbitration? Is arbitration suspended until completion of the project? Is the arbitrator allowed to award legal costs to the successful party? In a multi-party situation, are all necessary parties bound to the same dispute resolution process? (See also my prior post on the pros and cons of arbitration vs. litigation.)

Dispute resolution clauses are often taken “off the shelf.” Yes, there are other issues that are usually much more pressing when you are negotiating the terms of a construction contract.  In the end you may decide to live with whatever dispute resolution process the other party has proposed. But don’t sign without at least considering if the dispute resolution clause is flawed or unfair.

Thursday, 15 September 2016

Significant SCC Decision Increases All Risk Insurance Coverage


Today, the Supreme Court of Canada (the “SCC”) issued a decision dealing with coverage under a builders’ risk insurance policy that has important implications for owners, contractors and insurance companies. At issue was the interpretation of the exclusion of coverage for “the cost of making good faulty workmanship,” which appears in many commercial risks policies.

Following installation of windows at a highrise commercial tower, the window cleaning company hired by the owner to remove paint from the windows scratched and damaged the surfaces by using improper tools and methods. The owner submitted a claim for the costs to replace the damaged windows. The insurance company denied coverage relying on an exclusion in the policy precluding coverage for the “costs of making good faulty workmanship”. There was an exception to this exclusion that the owner relied upon. This exception provided that coverage would still be available for physical damage resulting from the faulty workmanship.

The SCC confirmed that the insured has the initial burden of proof, and must establish that the scope of coverage encompasses the damages. In this standard form builders’ risk policy, the coverage was very broad and included all physical loss and damages. At trial, the insurance company conceded that the damage fell within the broad coverage. Once this initial burden is met, the insurance company had to establish that any exclusions in the policy applied. Thus, the issue to be determined was whether the physical damage to the windows resulting from the improper cleaning methods was covered by the policy as an exception to the exclusion.

In this case, the SCC overturned the Alberta Court of Appeal, agreeing with the owner that only the costs of cleaning the re-installed windows would not be covered as a result of the exception. They concluded that it is not necessary for an exclusion to have a direct correspondence to physical loss. Instead the exclusion could be limited to the costs of the faulty workmanship alone. The result was that the exclusion clause only applied to the cost of redoing the faulty work (i.e. the cost of re-cleaning the windows). The physical damage to the windows themselves was not excluded due the exception for resulting damage. The SCC agreed that both of the proposed interpretations from the owner and the insurance company were plausible such that the contract was ambiguous. The court resolved the ambiguity based upon the overarching purpose of the insurance contract which is to provide broad coverage. The owners’ interpretation furthered the purpose of the contract. Conversely the insurance company’s interpretation undermined the purpose of the policy. The insurance company was required to pay for the replacement costs of the windows and could only refuse to pay for the cleaning costs afterwards under the faulty workmanship exclusion.

The fact that the window cleaning company was different from the window installation company appears to be significant. If only one company had installed and washed the windows under a single contract, it seems that the exclusion clause would have precluded coverage for the cost of replacing the windows and subsequent cleaning. If there had only been one contract, the SCC appears to suggest that the faulty workmanship would relate to the entire scope of work for both installation and washing such that the faulty workmanship exclusion would have precluded coverage for the replacement costs.

The result of this decision is very significant for parties to construction insurance contracts which are variably referred to as builders risk, contractor’s risk, all risks, multi-risk and course of construction insurance. Typically these policies are issued to owners and general contractors to cover all physical risks to the construction site.

In light of this decision, it may be prudent for owners and contractors to separate work that poses significant risks of damaging other expensive portions of the project into separate contracts with different trade contractors. This could facilitate increased coverage under a builders’ risk policy by establishing a basis for owners and contractors to argue that faulty workmanship is limited to the scope of each contract and therefore any detrimental effect of poor performance by one contractor upon other another contractor’s work fits within the exception of resulting damage (and therefore the loss is insured). Arguably this would establish coverage for losses that would otherwise be excluded on the basis of faulty workmanship if all the work is performed under one contract. Overall, this decision certainly benefits owners and contractors by confirming a broader interpretation of builders’ risk policies.

Insurance companies should be aware that the exception for resulting damage from the exclusion of coverage for faulty workmanship will not afford them the degree of protection they may have intended, or believed to be in place based on prior case law. In this case, an improperly performed $45,000 window cleaning contract resulted in approximately $2.5 million in liability for the costs to replace windows that were damaged as a result of faulty workmanship.

Wednesday, 14 September 2016

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 impliedly 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.

Tuesday, 14 June 2016

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.