Construction law update Articles:
CONSTRUCTION LAW UPDATE - Acknowledgement of Payment in Full
The Ontario Court of Appeal decision in Miller Paving Ltd. v. D. Gottardo Construction Ltd. is another example of a significant loss that can arise because a party is not careful about what it signs. In this case, Gottardo was contracted to supply aggregate materials for a highway renovation. Gottardo subcontracted out the supply to Miller Paving. When all supplies had been rendered, Gottardo signed an Acknowledgement to the owner that its work had been completed and fully paid for. Gottardo naturally asked for and received a similar Acknowledgement from Miller Paving. Subsequently, Miller Paving discovered that, in fact, it had not been paid in full and rendered an invoice for the unpaid aggregate. The Court of Appeal held the Acknowledgement of Payment was binding because Gottardo was not aware of the mistake and in reliance upon the Acknowledgement given by Miller, Gottardo had released claims against the owner. Also, the doctrine of unjust enrichment did not apply. Accordingly, careful attention should be paid when you are asked to acknowledge full payment regardless of what form that acknowledgment takes, ie. letter, formal agreement, statutory declaration and the like.
CONSTRUCTION LAW UPDATE - Subcontractors Time Limit to Lien
In Blockwall Masonry Limited v. Arcaio Design a subcontractor rendered its invoice claiming it was 100% complete. A period of 45 days expired since the subcontractor last appeared on site. Subsequently, the subcontractor reattended site to perform legitimate work. The Court found its lien was out of time and the last attendance inside the 45 day period was an attempt to resurrect its expired lien. The same principle would also apply if you are a subcontractor and the general contract was either cancelled or abandoned and the last work you had performed was 45 days prior to the cancellation or abandonment.
CONSTRUCTION LAW UPDATE - INTEREST
In Ontario, a creditor may be awarded interest on a debt owed to him or her, either by statute law or
by agreement. In the absence of an agreement to pay interest, a successful claimant may, subject to
the Court's discretion, be awarded interest on the debt both before and after judgment at the pre-
judgment and post-judgment interest rate fixed by statute. Essentially, the rate is the bank rate
established by the Bank of Canada at which it makes short term advances to banks rounded to the
next higher whole number plus one percent (1%). The rate is recalculated each quarter. (See Courts
of Justice Act, R.S.O. 1990, c.43, S. 127-130).
As to an agreement to pay interest between the parties, in the absence of an express agreement to pay
interest, an agreement may be inferred from the course of conduct of the parties or by reason of an
acknowledgment of such agreement. However, an agreement to pay interest will not be inferred
merely by unilateral insertion for interest on invoices, nor from the provision of a discount for early
payment of an invoice. (See N.B.C. Mechanical Inc. v.A.H. Lundberg Equipment Ltd 50 C.L.R.
2(d) 1). Further, Section 4 of the Interest Act stipulates that where, by the terms of any written or
printed contract, interest is made payable at a rate or percentage per day, week, month, or at any rate
or percentage for any period less than a year, no interest exceeding the rate of five percent (5%) per
annum shall be charged or recovered unless the contract contains an express statement of the yearly
rate or percentage of interest to which the other rate or percentage is equivalent. In short, if in your
written agreement you claim interest at two percent (2%) per month, you would only be entitled to
interest at five percent (5%) unless you stipulate in the agreement what the equivalent annual rate of
two percent (2%) per month is (ie - 26.8%).
Further, in respect of the Claim for Lien, you are not entitled to a lien for interest even though you
have an agreement to pay interest. You are however entitled either to the statutory or agreed rate
of interest by way of personal Judgment. (See S. 14(2) of the Construction Lien Act, R.S.0.1990,
CONSTRUCTION LAW UPDATE - BREACH OF TRUST
It is now clearly established in Ontario that a Trustee of the trust funds created under the Construction Lien Act, Ontario who uses the trust funds on a particular project to pay the Trustee's general overhead expenses is in breach of the trust obligations under the Act should the beneficiaries of that trust fund go unpaid. Further, trust funds should not be co-mingled in accounts used for payment of general operating and personal expenses. In that regard, reference should be made to the following decisions:
St. Mary's Cement Corp v. Construc Ltd., 33 C.L.R. (2d) 234;
Rudco Insulation Ltd. v. Toronto Sanitary Inc., 42 O.R. (3d) 292; and
Dietrich Steel Ltd. v. Shar-Dee Towers (1987) Ltd., 45 C.L.R. (2d) 178.
In cases where you are a Trustee of such trust funds, you should ensure that you comply with your trust obligations. In cases where you are an unpaid beneficiary of the trust, and even though your lien rights have expired, you may be entitled to mount a trust fund claim in the event that your immediate contracting party has breached its trust fund obligations.
CONSTRUCTION LAW UPDATE - INVOICING
The risks inherent in rendering a premature completion invoice in the hope of expediting payment and release of holdback was illustrated in a recent decision of the Ontario Court of Justice in Belmar Sheet Metal Company Limited v. 849539 Ontario Inc., 22 C.L.R. (2d), 182. In this case, a subcontractor rendered a final invoice indicating his subcontract to be 100% complete. The subcontractor maintained that in fact the subcontract was not then fully complete, and that the invoice was rendered as it was with the concurrence of the general contractor with the hope of expediting the release of holdback funds. The subcontractor maintained that in fact, the last work was done the following month and registered its lien within 45 days of the date of this alleged last work. The subcontractor tendered its time sheets to purportedly substantiate the performance of the last work, but did not call the workers who performed the work, nor the author of the time sheets to verify its position and to substantiate the alleged fact that the work was not complete when it was invoiced complete. The Court dismissed the lien claim as being out of time indicating the invoice had been falsely prepared to obtain release of holdback and therefore raised grave concerns over the reliability of the time sheets put forward as alleged proof that the work was not then complete, but completed later. Under these circumstances, the Court refused to place any weight or reliance upon the time sheets.
The lien claimant could find no solace in the fact the general contractor allegedly knew and concurred in the premature invoicing. Even if this fact was proven, it would not prevent, nor did it prevent in this case, the owner and the other lien claimants from opposing the lien.
Accordingly, if you adopt a similar practice of rendering premature final invoices, you should seriously reconsider same in the light of this decision.
CONSTRUCTION LAW UPDATE - SURVEYOR'S LIEN
I wish to draw your attention to a recent decision of the Ontario Court (General Division) in Smith & Smith Kingston Ltd. v. Kinalea Development Corp., 22 C.L.R. (2d) 234. In this case, the Court found that a surveyor performing services directly related to the actual construction of improvements (ie - performed for the direct purpose of enabling the owner to proceed with the actual construction) was entitled to a Claim for Lien. The Court indicated that whether the services of a surveyor were lienable was a question of fact to be determined from the circumstances of each case. In this case, the Court found that the surveyor had to be on site to do work necessary to ensure compliance with zoning by-laws and in several instances, construction plans had to be altered to ensure that the buildings fit within the lot size available. In this case, the Court found that the construction by the owner could not have taken place without the surveying work done by the lien claimant. However, where the surveying simply involves a determination of a boundary between two properties and nothing more, those services would not, this Court stated, be lienable.
CONSTRUCTION LAW UPDATE - LIEN TIME & REMEDIAL WORK
In Canadian Rogers Eastern Ltd. v. Canadian Glass, 12 C.L.R. (2d) 219, the Court held that doing work or supplying materials to rectify defective or improper workmanship or materials would not extend the time for registering a Claim for Lien by a subcontractor or a supplier. In this case, the subcontractor's work was completed March 19th and invoiced in full. On June 8th, in response to a demand by the general contractor, the subcontractor reattended to repair defects and registered a lien
forty-five (45) days thereafter. The Court found the lien was registered out of time. Its Lien should have been registered within forty-five (45) days of March 19th, 1993 when it did its last work.
Accordingly, you cannot regard the performance of work or supply of materials to rectify defective or improper workmanship or material or the performance of work under a Guarantee or Warranty as extending the time for filing your Claim for Lien.
CONSTRUCTION LAW UPDATE PUBLICATION OF CERTIFICATE OF SUBSTANTIAL PERFORMANCE AND SUBCONTRACTOR'S LIEN TIME
If you are a subcontractor and you are relying upon the date of publication of a Certificate of Substantial Performance of the General Contract as the date from which your lien rights commenced to run for services and materials supplied on or before the date of Substantial Performance, you may unwittingly be allowing your lien rights for such work to expire. The Construction Lien Act stipulates that the lien of any person other than the contractor for services or materials supplied to the improvement on or before the date certified or declared to be the date of Substantial Performance of the Contract expires at the conclusion of the 45-day period next following the occurrence of the earliest of:
(1) - the date on which a copy of the Certificate/Declaration of Substantial Performance is published,
(2) - the date on which you last supplied services or materials to the improvement, and
(3) - the date your subcontract or a subcontract of which you are a derivative is certified to be completed under Section 33.
The present line of authorities interprets (2) above as relating to the services or materials supplied to the improvement, either on or prior to the date of Substantial Performance. This may be illustrated by the following example:
June 1/99 - You supply services or materials to the Project under your subcontract. You are 90% complete and must await work being done by other trades before you can complete.
July 15/99 - The architect issues a Certificate of Substantial Performance of the Contract of the General Contractor.
July 20/99 - The Contractor publishes the Certificate of Substantial Performance.
July 21/99 - You supply services or materials to complete the balance of your subcontract.
July 25/99 - You register a lien for all of the services or materials supplied by you under your subcontract.
IN SO DOING, YOU MAY HAVE LOST YOUR LIEN RIGHTS FOR ALL SERVICES AND MATERIALS WHICH YOU SUPPLIED ON OR BEFORE JULY 15, 1999. The reason for this is that the time within which you must register your Lien for services and materials supplied on or before the date of Substantial Performance runs from the date you last supplied such services and materials (ie. June 1, 1999) or the date of publication of the Certificate of Substantial Performance (ie. July 20, 1999), whichever is the earlier. In this case, the earlier date is June 1, 1999.
You have a separate lien for work done after the date of substantial performance (ie. the work done July 21, 1999) and in respect of which your lien is in time because it was registered within forty-five (45) days of July 21, 1999, there being no Certificate of Completion of your subcontract or a derivative subcontract.
CONSTRUCTION LAW UPDATE
LABOUR AND MATERIAL PAYMENT BONDS
If the company or entity with whom you contracted provided a Labour and Material Payment Bond on the project, you may have a claim under that bond for reimbursement of your outstanding receivable even though your lien rights may have expired and the party with whom you contracted is bankrupt. You should immediately upon entering into your contract determine whether or not the party with whom you are contracting filed a Labour and Material Payment Bond and if so, obtain a copy of the bond. It is important that you know of the existence of the bond and the contents as each bond has strict time limits within which to make claims.
CONSTRUCTION LAW UPDATE WHETHER TO LIEN OR NOT
All too often, the decision of whether or not to register a Claim for Lien is a difficult one. Your receivable is sufficiently large such that you cannot avoid protecting your rights, but on the other hand you have a longstanding, good relationship with the particular company with whom you contracted. To make matters worse, your lien time is fast approaching. To assist in this decision making process, I recommend that each time you open a job file for a particular project, you insert inside the cover a sheet of paper divided into two (2) columns; one titled "Lien" , the other titled "Don't Lien". As the file progresses, you insert the events that may occur which would prompt you to lien, or prompt you not to. For example, continued delay in receipt of progress payments, progress payments improperly cut back, progress payments reduced by unsubstantiated and invalid back charges. Examples in the "Don't Lien" column would be long standing relationship, existing ongoing contractual relationships, Labour and Material Payment Bond available. By maintaining such a list, you will be assisted in making your determination, and in many instances, hopefully be forewarned of impending problems.
CONSTRUCTION LAW UPDATE
MAKING YOUR RECEIVABLES COLLECTIBLE
In addition to enforcing your legal rights by way of lien, trust fund claim, Labour and Material Payment Bond claim and action, there are many things that you can do yourself to make your receivables collectible. This should be one of your primary considerations from the point in time you are asked to submit a bid or tender. Here are some ways in which you could possibly assist yourself in making your receivable collectible :
1. Obtain a credit check on the party with whom you propose to contract.
2. In your contract negotiations, try to condition your deliveries on receipt of prior progress payments.
3. Do not agree to "pay when paid" clauses.
4. Where feasible and appropriate, you may be able to enter into separate contracts dividing the scope of your work as, for example, between material deliveries and installation. There should be no holdback retained on material deliveries and you may be able to receive full payment on account of your materials before your installation begins
5. Determine whether there is a Labour and Material Payment Bond on the project, and whether you have rights under it.
6. Keep careful watch on the red flags of warning so that you are able to become forewarned as to your receivable being at risk. Some of these red flags of warning include :
(a) delayed progress payments;
(b) unjustified cutbacks in progress payments;
(c) delayed payment attributable to the fault of others;
(d) unsigned or undated cheques;
(e) complaints by the owner about the delay in completion of the project;
(f) complaints by the contractor of excessive extras on the project.
CONSTRUCTION LAW UPDATE - PAY WHEN PAID CLAUSE
If you are presented with a contract whose payment provisions condition payment to you upon receipt of payment by your contracting party, you must give careful consideration as to whether or not to agree to such a clause since it provides a further risk and potential delay to your payment. Typically, the clauses stipulate that payments are to be made thirty (30) days of submission date of your invoice, or ten (10) days after certification of your work, or when the party with whom you contract has been paid. The Ontario Court of Appeal has held that such pay when paid clauses, if clearly worded, are enforceable. Recent times have seen the increasing use of such clauses. You should know that they are not consistent with the payment provisions in the standard CCDC and CCA contracts. You accordingly should be wary of such clauses. Although the Courts enforce these clauses, they require that the wording be clear and unambiguous, and further, that the reason for nonpayment should not be due to the default or neglect of the party who intends to rely upon the clause. Needless to say, caution should be exercised whenever you are presented with a contract or subcontract containing such clauses.
CONSTRUCTION LAW UPDATE - TENDERS & EXTRAS
The decision of Donald Servant Electric Ltd. v. Beaver Road Buildings Ltd., 47 C.L.R. (2d) 165 (OSCJ) is interesting in two respects; namely, the binding effect of a subcontractor's bid to a general contractor and as to the performance of work claimed to be extra on the strength of the contractor's undertaking to use best efforts to assist the subtrade in obtaining an extra.
In this case, an electrical subcontractor submitted a bid to perform the electrical work in accordance with the "job specification". The subtrade alleged that certain high voltage duct bank work was not included in the job specification based on an alleged conversation with the Consultant of the owner. The subtrade allegedly informed the general contractor of this fact before the tender closing date. Subsequently, when the form of subcontract/purchase order was tendered to the electrical subcontractor, it inserted a note that the duct bank work was not included. The form of subcontract stipulated that the scope of work was to be based upon the "job specification". Thus the Court was faced with two contradictory items in the subcontract. The Court resolved it on the basis of the Ron Engineering Line of decisions ie - that when the electrical subcontractor submitted a bid which was a compliant bid and included the performance of electrical work in accordance with the job specifications, Contract A came into being and bound the subtrade to sign a formal subcontract and to complete the specified work in accordance with the job specification. It was immaterial that the subcontractor may have been mistaken as to the scope of electrical work under the specifications. The contractor had bound itself to the owner based on the subtrade's bid.
In order to encourage the subtrade to complete the disputed duct bank work, the general contractor orally undertook to use its best efforts to assist the subtrade in obtaining additional work from the owner in order for it to recover the costs of the disputed duct bank work. The contractor attempted to obtain the additional work for the subtrade, but failed. The Court concluded that the best efforts obligation was nothing more than an informal arrangement and too vague and general to be enforceable. This same reasoning could be applied to a best efforts undertaking to assist a subtrade in obtaining additional payment for the performance of a disputed item of work. In short, best efforts undertakings are not a satisfactory method of dealing with a disputed extra.
TRUST ACCOUNT FOR CONSTRUCTION PROCEEDS
In a recent case, S.E. Rozel & Sons Inc. v. Groff, 2 C.L.R. (3d) 58, a trustee of trust funds under the Construction Lien Act, R.S.O. 1990 commingled the funds received with other funds from unrelated projects in a general account with its own funds. The trustee kept records to trace the funds by various job numbers so as to identify each deposit and withdrawal by means of a job number. In an action against the trustee for breach of the trust fund provisions under the Construction Lien Act in respect of a particular project, Mr. Justice Quinn held that the trustee committed a breach of trust when it commingled trust funds with funds from unrelated projects in a general account because in so doing, the trustee placed the trust funds at risk since depositing them into the general account rendered them at the mercy of a nervous banker or available to a judgment creditor of the trustee. Accordingly, persons who receive trust funds under the Construction Lien Act and are trustees thereof must take this case into account and should consider opening a separate trust account for such trust funds.
CONSTRUCTION LAW UPDATE - SITE ATTENDANCE
In I.B.E.W. Trust Fund, Local 353 v. 779857 Ontario Inc., 36 C.L.R. (3d) 48, a project job site closed for the Christmas holidays. Thereafter, workers attended the job site at their employers request ready to undertake work but were told that the employer’s contract was terminated and left site as requested without performing any work. The wage earners preserved a lien for wages and supplementary benefits within 45 days of the last site attendance. Master Sandler of the Ontario Superior Court of Justice held that the lien was preserved within the required time. The wage earners attendance at the site, ready for work, readying their tools and equipment for the day’s work and cleaning up and packing up their tools and equipment constituted work done and a supply of services. The argument against the lien that what was done did not create any actual benefit to the premises was rejected.
CONSTRUCTION LAW UPDATE - INSTALLATION OF EQUIPMENT - LIENABLE OR NOT?
In Kennedy Electric Limited v. Rumble Automation Inc. et al it was held that the following work performed was not lienable; namely, the supply and installation of an assembly line for an automotive plant. The scope of work included 100 mezzanine platforms, 165 robots and was bolted to the floor. As installed, the assembly line covered 100,000 square feet of space standing 20 feet tall, weighing approximately one-half million tons. The line could easily dismantled and removed from the building without any significant damage to the building. The Court held that what was installed was not in the definition “of an improvement” under the Ontario Act. Adopting previous decisions of the Ontario Courts, the Court in this case held that although the assembly line was attached to the building, it was not and did not become part of the building nor was it incorporated into the building, and thus not an improvement. In the result, care should be taken in determining whether or not the nature of work, service or material formed upon or in respect of the processes or equipment in a building are lienable.
CONSTRUCTION LAW UPDATE - HAULAGE OF BUILDING MATERIAL - LIENABLE OR NOT?
Kennedy Electric Limited v. Rumble Automation Inc., a transportation firm registered a Claim for Lien under the Construction Lien Act for services rendered in regard to transporting the disassembled assembly line from one building site to another involving 165 truck loads. The transportation company did not load nor unload the equipment. The Court held that mere transportation of building materials to site and nothing more does constitute lienable work, service or material since the mere transportation was not work which integral or a necessary part of the actual physical construction of the project. It should be noted this decision applies only to a lien limited to transportation of construction materials. It would not apply to a case where building materials were sold and part of the sale required the seller to ship the materials to site.
CONSTRUCTION LAW UPDATE - LIEN ACT TIME LIMITS CANNOT BE EXTENDED
In Delview Construction Limited v. Meringolo, 71 O.R. (3d) 1, the Ontario Court of Appeal held that the time limits within which to preserve and perfect a Construction Lien were mandated by Statute, leave no room for judicial discretion and cannot be extended. Once the lien time expires, the lien is lost.