B.C. Court of Appeal Rules on Direct Owner-Subcontractor Arrangements Under Builders Lien Act

In Pinnacle Living (Capstan Village) Lands Inc. v. Fairway Recycle Group Inc. (Pinnacle Living), the British Columbia Court of Appeal (Court) recently considered the ability of an owner to obtain a discharge of a lien by payment of the statutory holdback amount into court under section 23 of the Builders Lien Act, in circumstances where the owner had allegedly agreed directly with the lien claimant to pay any unpaid invoices.

The Court held that the owner’s alleged agreement to pay invoices outstanding from a contractor to a subcontractor did not change the contractual relationship between the contractor and the subcontractor to supply work and services in relation to an improvement on the owner’s land, which was the source of the subcontractor’s lien rights. The owner’s direct contract with the subcontractor to pay outstanding invoices was not a contract to provide work or materials, did not create lien rights and did not change or create new holdback obligations. The owner was, therefore, entitled to rely on section 23 of the Builders Lien Act and discharge the lien by payment of the statutory holdback amount into court.

Background

Pinnacle Living (Capstan Village) Lands Inc. (Pinnacle) was the owner-developer of a development in Richmond, British Columbia, and engaged Mondiale Development Ltd. (Mondiale) as the general contractor for the project. Mondiale subsequently engaged Tarrier Group Inc. (Tarrier) as a subcontractor, with Tarrier then sub-subcontracting certain work to Fairway Recycle Group (Fairway).

During the course of the project, Tarrier failed to pay certain invoices issued by Fairway. As a result of the unpaid invoices, Fairway had discussions with Mondiale and Pinnacle, which Fairway alleged resulted in Pinnacle agreeing to pay the outstanding invoices in exchange for Fairway not filing a lien against the property (a Payment-Forbearance Agreement). However, Pinnacle failed to pay the outstanding invoices, and Fairway filed a lien against the property.

Pinnacle applied to the court to discharge the lien (among others filed by other subcontractors) in accordance with section 23 of the Builders Lien Act. In doing so, Pinnacle sought to have all liens discharged by paying into court the statutory holdback amount, rather than the full amount of the lien claims. Fairway argued that Pinnacle could not rely on section 23 to discharge its lien, as Pinnacle had engaged Fairway directly pursuant to the Payment-Forbearance Agreement. The British Columbia Supreme Court agreed with Fairway and ruled that the Payment Forbearance Agreement represented a direct contract between the owner and the sub-subcontractor, barring the owner’s ability to discharge the lien under section 23 of the Builders Lien Act.

Court of Appeal’s Decision

On appeal, the Court identified two separate contractual arrangements:

1. The subcontractor (Tarrier) engaged the sub-subcontractor (Fairway) to supply work and services in relation to an improvement on the owner’s land.
2. After the completion of Fairway’s work under its agreement with Tarrier, the owner (Pinnacle) and the sub-subcontractor (Fairway) entered into the Payment-Forbearance Agreement, under which the owner agreed to pay the outstanding invoices in exchange for the sub-subcontractor not filing a lien.

Section 23 of the Builders Lien Act states that owners can discharge lien claims filed against their property by subcontractors through a payment into court, provided the owner did not “engage” the subcontractor directly. The Court clarified that section 23 only refers to contracts regarding work or materials being supplied for an improvement. It does not govern all contracts between owners and subcontractors. 

The Court concluded that the Payment-Forbearance Agreement did not alter the lien rights and obligations of the parties under the Builders Lien Act, as it did not alter the prior contract between the subcontractor and the sub-subcontractor. Fairway’s contract with Tarrier gave rise to Fairway’s lien rights and Pinnacle’s holdback obligations, whereas, since the subsequent Payment-Forbearance Agreement between Pinnacle and Fairway was not a contract to provide work or materials for an improvement, it did not create lien rights, nor did it change the parties’ existing lien rights and holdback obligations. 

The Court allowed the appeal, finding that Pinnacle was entitled to discharge Fairway’s lien upon the payment into court of the statutory holdback amount pursuant to section 23 of the Builders Lien Act. However, the Court noted that this would not affect Fairway’s separate rights to bring an action for alleged breach of the Payment-Forbearance Agreement.

Key Takeaways

Pinnacle Living clarifies that, for the purposes of the Builders Lien Act, subsequent direct contractual arrangements between an owner and subcontractor will not alter the prior contractual arrangements between subcontractors and general contractors. It also suggests that an agreement between an owner and subcontractor to pay outstanding debts owed by a contractor to a subcontractor may not engage the Builders Lien Act, as it is not a contract to provide work and materials.

Finally, while the Builders Lien Act may limit the liability of owners with respect to claims by subcontractors that are not directly engaged by the owner, the facts of Pinnacle Living do caution that an owner’s potential liability may be expanded if an owner later reaches an independent agreement with a subcontractor to settle outstanding invoices.

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