When there is a payment dispute between the general contractor and its subcontractors, sometimes the owner will withhold the amount owed to the general contractor until the subcontractors’ claims are settled. This situation places the owner in a tricky position. One option for owners in this scenario is to pay the funds into court.

Background

Opaskwayak Cree Nation (“the Nation”) retained Razer Contracting (“Razer”) to upgrade its water treatment plant. Razer retained various subcontractors. Under the prime contract, the Nation was obligated to wait for statutory declarations from Razer certifying that subcontractors had been paid before it could release payments or holdbacks to Razer.

While Razer provided statutory declarations for many of its subcontractors, eight of its subcontractors had not been paid. Consequently, the Nation was obligated to withhold $1.2 million in funds owed to the general contractor. The Nation had no real dispute with any of the parties, nor did it claim a beneficial interest in any portion of the $1.2 million. Accordingly, the Nation brought an interpleader application seeking permission to pay the $1.2 million into Court and be removed from further litigation.

The principal amount claimed by the subcontractors was $170,000 less than the total $1.2 million sought to be paid into Court. Razer argued that it should be paid this $170,000 directly. The subcontractors argued that the Nation should pay all $1.2 million into Court, because the principal amounts claimed did not include interest or legal costs.

A further issue was whether two of the subcontractors who were on the verge of settling their disputes with Razer could immediately collect their settlement from the money paid into Court, or if they had to wait until all parties resolved their disputes before they could collect.

What the Court Said

In Manitoba, like Alberta, a party can deposit disputed money in which it claims no beneficial interest into Court through an interpleader application. The essential requirements to interplead funds are that:

1. Two or more parties both claim to be entitled to funds;
2. The party paying those funds into court wants to do so; and
3. The party paying those funds into court claims no beneficial interest in the funds. 

The Court in Opaskwayak had no issue granting the Nation an interpleader order, because the Nation claimed no beneficial interest in the $1.2 million, and entitlement to those funds was disputed between Razer and its subcontractors.

The Court found that the full $1.2 million should be paid into Court, even though the subcontractors’ principal claims totaled $170,000 less. In coming to that conclusion, the Court considered the nature of the agreements between Razer and its subcontractors. Nearly all the subcontracts included interest rates that Razer was obligated to pay in the event of late payments. The Court held that any claimed interest formed part of the principal amount claimed by the subcontractors.

The Court noted that the Manitoba Builders’ Lien Act supported this interpretation. That Act provides that the funds held by the Nation, as owner, were held in trust for the benefit of all contractors and subcontractors to whom it owed money. Further, these trust provisions prevented the Nation from moving or paying any of the funds held in trust without being satisfied that other beneficiaries, namely subcontractors, had been justly paid for their work. As such, the Court reasoned that the Nation would breach its obligations as a trustee if it paid the $170,000 to Razer.

The Court concluded by holding that the two subcontractors who were ready to settle would be immediately entitled to their share of the money from the $1.2 million paid into Court. The Court based its decision on its long-held position that courts must always encourage settlement before trial. The Court understood that it was common for some subcontractors to be paid before others in the construction industry. Since the $1.2 million was being held in Court for the express purpose of paying the unpaid subcontractors, it made no sense to delay the two subcontractors in accessing funds they were entitled to.

Takeaways

While Opaskwayak was decided in Manitoba, most of the principles applied in this case also apply in Alberta and across Canada. Owners can be responsible for withholding payments to their general contractors, either by contract or through the holdback/lien fund provisions of lien legislation.

Owners can extricate themselves from litigation by paying disputed funds into court for others to fight over. This provides financial security for these unpaid parties, as the funds are held in a neutral location and subject only to the claims of particular claimants. It also benefits owners, as it allows them to pay funds which they have no interest in.

The intricacies of interpleader applications, interest claims, and disputes in the construction industry are often complicated and can leave owners, general contractors, and subcontractors alike feeling vulnerable. Contact Anthony Burden in Calgary, Ryan Krushelnitzky in Edmonton, or any other member of Field Law’s Construction Law Group if you need help navigating a construction dispute.

Link to decision: Opaskwayak Cree Nation v Razar Contracting Services Ltd., 2023 MBKB 119