The Alberta Construction Trust, the decision in ATB Financial v DLM Oilfield Enterprises Ltd, 2020 ABQB 562, and Bill 37 (Prompt Payment)

November 17, 2020 | Emma L. Johnston

Recent years have seen a developing body of law in Alberta as to the application of the construction trust found in Section 22 (the “Section 22 Trust”) of the Builders’ Lien Act, RSA 2000 c B-7 (the “Act”). This Section provides as follows:

22(1) Where

(a) a certificate of substantial performance is issued, and

(b) a payment is made by the owner after a certificate of substantial performance is issued

the person who receives the payment, to the extent that the person owes money to persons who provided work or furnished materials for the work or materials in respect of which the certificate was issued, holds that money in trust for the benefit of those persons. [emphasis added]

In the decision ATB Financial v DLM Oilfield Enterprises Ltd, 2020 ABQB 562, Canadian Natural Resources Ltd. (“CNRL”) argued that funds it paid to its contractor, DLM Oilfield Enterprises Ltd. (“DLM”), were held in trust for the unpaid subcontractors of DLM on the basis of the Section 22 Trust. The subcontractors had registered liens against CNRL’s leasehold interest on the CNRL Horizon project. The payment made by CNRL to DLM was made to DLM’s court-appointed receiver after the registration of the liens.

The issue before the Court was whether Section 22 of the Act, which on its face imposes a trust on payments made after a certificate of substantial performance (“CSP”) has been issued, operates when a CSP has not been issued. In his decision, Justice Lema confirmed that the Section 22 Trust does not exist when no CSP has been issued. The decision, while not surprising given the plain wording of the Section, is a useful confirmation of the limits of the Section 22 Trust.

In addition, CNRL attempted to invoke unjust enrichment to impose a trust over the funds it paid to DLM’s Receiver. The Court rejected this argument. The Court held that the payment to DML was based on contractual obligations and that a payment pursuant to a contract trumps any argument that the enrichment is unjust or gives rise to restitution by way of trust.

In respect to the unjust enrichment claim invoked by CNRL, Justice Lema held that a contract between an owner and contractor dealing with the work and services contradicts the contractor’s entitlement to a remedy in unjust enrichment. The Court provided several reasons for this determination. First, that there is no room for an implied obligation if there is an express contract. If the bargain turned out badly, that is not a sufficient reason to invoke the equitable remedy of unjust enrichment. Second, the claimant’s right to claim for damages and the defendant’s right to retain the benefit and profit which it received from the contract will discount any unfairness to the claimant’s alleged detriment. The Court held that it is the contractual allocation of risks, rather than the unavailability of contractual relief, that excludes unjust enrichment.

With the Section 22 Trust not applying and no unjust enrichment shown, CNRL’s argument for trust treatment of its payments to DLM’s receiver failed.

Certificates of Substantial Performance: Opportunities for subcontractors and lien claimants

This decision should emphasize that unpaid subtrades can pursue a number of remedies, of which the timely registration of a lien is only one. Other potential claims include claims under labour and material bonds and claims under the Public Works Act, RSA 2000 c P-46 (the “PWA”).

Justice Lema’s decision supports the position that the posting of a CSP in respect of a subtrade’s work should be added to that repertoire. Specifically, the decision confirms that a subcontractor can issue a CSP in accordance with the terms of the Act, which will trigger the Section 22 Trust. Given that the trust has been applied in circumstances where a lien may be unavailable, this is an important remedy to consider either in addition to a lien or in circumstances where the lien has been missed.

Specifically, a subcontractor can use the CSP to impose trust conditions on those receiving funds above it, presuming, of course, that its work is substantially performed. In this scenario, the subcontractor would issue a CSP in respect of its scope of work alone.

Payments in the Face of an Insolvency: Risks to Owners

The within decision also emphasizes the risk to owners or generals in making payments in the face of liens. In this case, CNRL was attempting to recover from a payment it ought not to have made in the face of the existing liens. Consequently, CNRL will likely have to pay twice for the same work, once to the DLM’s Receiver and again to the lien claimants who are still entitled to their respective share of the lien fund.

Conversely, if CNRL had directly paid the lien claimants without the agreement of the Receiver it is possible that it would remain contractually obliged to DLM as the payment would not decrease the amounts owed to DLM. First, Section 29 of the Act requires the owner to provide notice of a proposed payment prior to making the same and further provides that the payment does not decrease the “lien fund” associated with the work. Second, absent direct payment and set-off clauses (the use of which forms an increasing complex body of case law) direct payments may be found to be invalid as they upset the priority regime determined by federal bankruptcy legislation.

The bottom line is that owners and generals faced with competing claims to the same funds should obtain legal advice prior to making any payments.

Upcoming Changes:

The within post is accompanied by comments from our colleagues on Alberta Bill 37, which would make various amendments to the Act. These amendments are intended introduce what is referred to as “prompt payment” in the Province. While our colleagues have addressed what the Bill accomplishes, it is also noteworthy in the topics it does not address that are covered by prompt payment and lien legislation in other provinces. Many of the areas which are unaddressed by Bill 37 are those that provide trades the best protection in the event of an insolvency. Specifically, provisions that secure payment in other forms once an insolvency has occurred.

Significantly, the Section 22 Trust is unaltered by Bill 37, and is not extended to cover payments made where there is no certificate of substantial performance.  Further, it remains unclear as to whether or not the prompt payment provisions are intended to apply to Government of Alberta projects. Currently, the Province takes the position that its projects cannot be liened. In those circumstances the only remaining remedies to a claimant may be a claim pursuant to the PWA. This legislation is brief and the protection provided to claimants pursuant to it is unclear. Bill 37 does nothing to address the losses frequently suffered where parties’ only remedy is pursuant to the PWA.

Lastly, as indicated by our colleagues, legislation in other Provinces has made labour and material bonds mandatory on some public projects. This change is not made by Bill 37.

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