Court denies validity of claim of lien but awards damages in unjust enrichment

The British Columbia Supreme Court recently considered whether a subcontractor’s claim of a builders lien was registered  within the prescribed time limits in British Columbia’s Builders Lien Act, SBC 1997, c 45 (the “Builders Lien Act”).  What makes this case particularly noteworthy are: (i) the Court’s findings regarding the relationships between the subcontractor, general contractors and the owner; (ii) the issue of whether the head contract had been terminated or assigned; and (iii) the subcontractor being awarded damages against owner for unjust enrichment.

In Hans Demolition and Green Oak (West 7th) Corp., 2021 BCSC 1472 (CanLII) (“Hans Demolition and Green Oak”) the Court reached two important conclusions regarding the nature of the contractual relationships formed between the owner and general contractor, and those between the general contractor and subcontractors.  First, the Court indicated that subcontractors have a responsibility to be diligent in understanding the status of the general contractor with whom they have contracted. Furthermore, and more importantly, the subcontractor should be aware of the status of the head contract between the owner and the general contractor and must protect their rights by seeking their available statutory remedies in a timely manner. The second conclusion, given the unique circumstances of this case, is that Courts may find that owners who choose to act contrary to the traditional contractual hierarchy between owners, general contractors, and subcontractors and engage directly with and provide instructions and assurances to subcontractors may find themselves liable to such subcontractors under the doctrine of unjust enrichment.

Background Facts

In Hans Demolition and Green Oak, Hans Demolition & Excavation (“Hans Demolition”), entered into a contract with the owner/developer, Green Oak Development (West 7^th) Corp. (“Green Oak”) in April 2015, for the removal of trees and hazardous materials from the property.  Green Oak directed and provided instructions to Hans Demotion.

In November 2015, Green Oak then entered into a construction contract with Webster Development (the “Webster Head Contract”) and Hans Demolition subsequently entered into a subcontract with Webster Development to complete the removal of hazardous material.  As such, the traditional head contractor and subcontractor relationship had been established.

However, during the course of the construction, Green Oak had significant problems with Webster Development’s performance and regularly engaged in direct communication with Hans Demolition regarding its work. In September 2016, Green Oak terminated the Webster Head Contract and entered into a new contract with Kindred Construction for the completion of the construction (the “Kindred Head Contract”).  Although Hans Demolition argued that it was not provided clear notice that the Webster Head Contract had been terminated, the Court found that Green Oak did inform Hans Demolition that due to delays and the condition of the worksite, Green Oak had decided to award the rest of the work to Kindred Construction.

Hans Demolition’s invoices for work performed under the subcontract agreement with Webster Development went unpaid. As a result, Hans Demolition filed a claim of builder’s lien in February 2017, several months after the termination of the Webster Head Contract, for work performed in 2016 and commenced the requisite action to enforce the  lien claim.  Hans Demolition also sought damages against Green Oak on the basis that it had been unjustly enriched by the work performed by Hans Demolition.

Outcome

The Builders Lien

The Builders Lien Act provides that, where there is a head contract, claims of a lien must be registered within 45 days of the head contract being completed, abandoned or terminated.  Hans Demolition argued that the Webster Head Contract had been assigned to Kindred Construction, that it had not been given notice that the Webster Head Contract had been terminated and that its lien was filed in time.  The Court rejected these arguments and found that the evidence was that Green Oak had terminated the Webster Head Contract and entered into a new head contract with Kindred Construction.  As a result, the Court held that the claim of lien registered by Hans Demolition was invalid since it was filed more than 45 days after the Webster Head Contract was terminated.

In reaching this decision, the Court noted that while other provincial lien statutes require owners to publish a notice when the head contract is terminated, there is no such requirement in the  Builders Lien Act.  The Court went on to suggest that the lack of such notice is also a “commercial reality” as owners may not know the identity of subcontractors working on a project.  Furthermore, the Court concluded that once Hans Demolition became aware that Kindred Construction had been retained by the owner to complete the project, it should have inquired into whether the Webster Head Contract had been assigned or terminated.  The Court went on to state that Hans Demolition was or should have been aware, that their contractual and business arrangements with Webster Development would be affected by the owner’s engagement of Kindred Construction and that Hans Demolition had a responsibility to ensure that it took steps to protect its interests and file a lien for any outstanding invoices within the prescribed 45 day period.

Unjust Enrichment

The Court went on to consider whether Hans Demolition was entitled to damages under the doctrine of unjust enrichment.  A plaintiff seeking damages in unjust enrichment must establish that there has been:

1. an enrichment to the defendant;
2. a corresponding deprivation to the plaintiff; and
3. the absence of a juristic reason for the enrichment.

Subcontractors are not generally awarded damages for unjust enrichment against an owner, as there are juristic reasons that operate to deny such damages.  These reasons include the traditional contractual framework between the owner and head contractor, and those between the head contractor and the subcontractors, as well as the remedies available to the subcontractor in the Builders Lien Act. The absence of a contractual relationship between the owner and subcontractor has been accepted by the courts as a juristic reason for denying a subcontractor recovery under the doctrine of unjust enrichment.

In awarding Hans Demolition damages for unjust enrichment, however, the Court indicated that the facts in this case were unique.  The facts indicated that Green Oak was directly involved in managing, directing and paying Hans Development for work on the project, prior to and subsequent to Webster Development being retained as the head contractor.  Additionally, and perhaps more significantly, the Court considered that Hans Demolition had informed Green Oak that it would not continue working on the project without assurances that it would be paid, and that  Green Oak had provided repeated assurances to Hans Development that its invoices would be paid.   The Court concluded that these direct communications, payments and assurances rose to the level of a business relationship, even if there was no contract between the parties and that the was no juristic reason for the enrichment.

Take-away

Subcontractors must be diligent in maintaining an awareness of the status of the general contractor with whom it has a contract.  Accordingly, subcontractors who become aware: (i) of ongoing problems between the owner and the general contractor; (ii) that the general contractor has been removed and/or replaced; or (iii) that the general contractor is not making payment or is making those payments late, may wish to consider seeking information and clarification from the general contractor as to what is happening and what steps the general is taking to remedy any problems.  Seeking information early and frequently provides the opportunity for subcontractors to take timely and effective steps to protect their interests, including but not limited to registering a claim of lien within the prescribed time limits in the Builders Lien Act.

Owners wishing to avoid the prospect of having to pay damages to subcontractors should respect the hierarchy of the contractual relationship established between the owners, general contractors, and subcontractors.  Owners would be wise to refrain from communicating, directing and making promises of payment to subcontractors. Owners would be wise to limit their communications regarding the work to the general contractor as much as possible and rely upon the general contractor to communicate with and pay its subcontractors.