In May 2017, Demikon entered into a contract with Aurelia with respect to a condominium project. Demikon was responsible for hiring and managing the various subcontractors that would supply services and materials for the project.

In March 2021, Aurelia terminated the prime contract, citing numerous delays, deficiencies in the work, and failure to cure defaults. Aurelia specifically advised Demikon that it intended to continue paying certain subcontractors. This advance notice is a prerequisite to making direct payments under s. 28 of the Construction Act.

Demikon registered a lien and commenced a lien enforcement action. Aurelia posted a lien bond to vacate the lien, but later brought a motion to reduce the lien bond amount to account for direct payments made directly to Demikon’s subcontractors.

Aurelia’s position was that it had directly paid the parties having a lien (Demikon’s subcontractors) pursuant to s. 28 and as a result, Demikon’s lien had been reduced by the corresponding amounts. Conversely, Demikon argued that s. 28 did not apply because the subcontractors that were paid by Aurelia were not lien claimants.

The motion judge granted Aurelia’s motion to reduce the lien bond by the amounts paid to Demikon’s subcontractors. Demikon appealed.

What the Court Said

The Divisional Court was asked to determine whether the motions judge had correctly interpreted s. 28, which states:

Where an owner, contractor or subcontractor makes a payment without obligation to do so to any person having a lien for or on account of any amount owing to that person for services or materials supplied to the improvement and gives written notice of the payment or the intention to pay to the proper payer of that person, the payment shall be deemed to be a payment by the owner, contractor or subcontractor to the proper payer of that person….[emphasis added]

The motion judge found that the words “any amount owing to that person” expanded the scope of s. 28 to include any party that was owed money for services or materials on a project. This definition would be more expansive than “any person having a lien”. The motion judge’s interpretation would have allowed payments to be made to parties that technically did not have a lien including:

1. subcontractors who supplied equipment, chattels or other services that did not form part of an “improvement” in the land; and
2. subcontractors who previously had a lien that had since expired or otherwise been resolved.

The Divisional Court concluded that this was an incorrect interpretation. Instead, limiting the scope of s. 28 to capture only payments to persons with a registered lien aligns with the purpose of the legislation and the context of the statutory scheme.

Put simply, when a party “has a lien”, they have an interest in the owner’s land. The owner has a corresponding interest in seeing the lien resolved. However, once the lien is resolved or expires, then that interest ceases to exist.

Due to the motion judge’s error in interpreting s. 28, Aurelia was not able to reduce the amount of its lien bond. As a result, Aurelia in effect was double paying for the same work – once through direct payments to subcontractors, and again through the lien bond which included the full amount of those direct payments.

Takeaways

This case provides owners with guidance on who they can pay directly as a means to reduce the value of a general contractor’s lien claim/underlying debt claim. It also serves as a warning to owners on the risks of making direct payments in an effort to resolve claims with unpaid subcontractors. If those subcontractors are not current lienholders, an owner can potentially end up paying twice for that work, at least prior to a final determination on the merits.

S. 28 of the Construction Act is very similar to s. 29 of the Prompt Payment and Construction Lien Act, and it is likely that a similar result would be reached by an Alberta court. However, the PPCLA also allows the party that receives the notice of an intended direct payment to raise an objection to the direct payment. If the objection is received before the direct payment is made, then the direct payment cannot proceed so as to reduce the owner’s liability to the general contractor.

As lien rights generally are a nuanced area of law, it is best to seek legal advice as soon as possible. Please contact Anthony Burden or Raymond Gallelli in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law's Construction Group for guidance and assistance in this area.

Link to decision: Demikon Construction Ltd. v. Oakleigh Holdings Inc., 2024 ONSC 6261