Canada: A Subcontractor's Personal Recourse Against The Project Owner

Several judgments have been rendered concerning the personal recourse1 of a subcontractor against the project owner on the grounds that the owner failed to obtain an acquittance2 from the general contractor before making the corresponding payment to the latter, in contravention of what the master contract generally provides.

This type of recourse has been characterized in two different ways:

  • as being framed in contractual liability, based on a "stipulation for a third party" in the master contract for the benefit of the subcontractor, in the form of a clause making payment by the owner to the general contractor conditional upon having obtained corresponding acquittances from the subcontractors, failing which withholdings must be made;
  • as being framed in extra-contractual liability, based on a fault committed by the owner in the circumstances surrounding the payment to the general contractor, such as a total lack of concern for the unpaid subcontractors.

1. Stipulation for a third party

The courts recognize the subcontractor's right to sue the owner directly for the payment of its claim to the extent that the master contract creates an express obligation on the owner's part ("must") as opposed to a mere option ("may") to make payment to the general contractor conditional upon the latter's having obtained acquittances from its subcontractors.

In its decision in Compagnie d'assurance Jevco v. Québec (Procureure générale)3, the Quebec Court of Appeal accordingly overturned a judgment of the Superior Court that dismissed a surety's action in warranty against the Ministry of Transport seeking indemnification for the amounts it had to pay to various subcontractors that had not been paid by the general contractor. The Court concluded that the trial judge had erred, since the Ministry, upon being notified that some subcontractors had not been paid, should have withheld the corresponding amounts from the general contractor, pursuant to the provision in the master contract obliging it to withhold, from the amount due to the general contractor, the amounts necessary to cover the claims specified in such a notice.

Another example of such a stipulation for a third party can be found in Acier d'Armature Ferneuf inc. v. Giguère et Geoffroy4, where the master contract provided that final payment could not be made until the general contractor provided the City of l'Assomption with a final acquittance from each of the subcontractors and any other persons having participated in the performance of the work. The Court found the project owner liable towards a subcontractor that had not been paid by the general contractor, who had been fully paid by the City before the general contractor went bankrupt.

It should be noted that in both of these cases, the subcontractors were not entitled to a legal construction hypothec, contrary to what was the case in the matter of Toitures Trois Étoiles Inc. v. Association sportive et communautaire du Centre-Sud Inc.    

In that case, the Quebec Court of Appeal upheld a judgment of the Superior Court that disallowed the subcontractor's claim despite a clause in the master contract worded as follows:  

 The contractor must, when submitting its requests for payment and as of the second such request, provide a solemn declaration certifying that it has paid the corresponding requests for payment by the subcontractors.

Both the trial judge and the justices of the Court of Appeal found that the clause evinced no intention on the part of the project owner, a local community sports association, of making a stipulation in favour of the subcontractors, but was rather intended to protect it from legal hypothecs that could potentially charge its facility.

Thus, the use of the verb "must" in this type of contract clause is not necessarily sufficient for it to be characterized as a stipulation for a third party, particularly where the subcontractor is entitled to a legal hypothec. The lack of that entitlement may justify a different interpretation of the clause, as it cannot then be construed as protecting the owner against hypothecs. We will revisit the importance of entitlement to a legal hypothec in our analysis of the extra-contractual liability of the project owner vis-à-vis a subcontractor.

The Superior Court also rejected the contention that there was a stipulation for a third party in the matter of Charles-Auguste Fortier Inc. (Arrangement relatif à)6, where the application of the contractual provision was clearly left to the discretion of the project owner.

2. Extra-contractual liability of the project owner vis-à-vis a subcontractor

In the absence of a stipulation for a third party, the project owner can still become liable towards a subcontractor if it acts unreasonably in light of the principles espoused by the Supreme Court of Canada in its decision in Bank of Montreal v. Bail Ltée7. It was on this basis that the Court of Québec found the City of l'Assomption liable in Acier d'Armature Ferneuf inc. v. Giguère et Geoffroy8, supplemented in this case by a stipulation for a third party, on the basis that the funds for the project were paid out without any concern for the subcontractors.

In the matters of Construction Innovatech Inc. v. 4413661 Canada Inc.9, Nord Industrie Inc. v. IEQ Structure inc.10 and Paysagement Clin d'Sil Inc. v. Services d'excavation JM Inc.11, the courts disallowed the recourses of subcontractors who failed to both produce the master contract or allege facts indicating the commission of a fault on the part of the project owners.

Mere disclosure of the existence of the subcontract to the project owner is insufficient grounds for the subcontractor to prevail, as it only serves to allow it to exercise its hypothecary rights and creates no additional legal nexus between the parties12.

In Paysagement Clin d'Sil Inc. v. Services d'excavation JM Inc.13, the Superior Court also termed "debatable" the theory applied by the Court of Québec in Acier d'Armature Ferneuf Inc. v. Giguère et Geoffroy14, whereby the project owner was purportedly obliged, independently of the provisions of the construction contract, to look out for the interests of the subcontractors to the point of paying them directly in the stead of the contractor15. If it thus seems preferable to base the subcontractor's extra-contractual recourse on a clause of the master contract allowing the project owner to make payment to the general contractor conditional on the submission of acquittances from the subcontractors, a subcontractor could also rely on Article 2123 of the Civil Code of Québec, which provides that the project owner can withhold, at the time of payment, an amount sufficient to pay the claims of persons who could charge the project with a legal hypothec.16

In its decision in Commission scolaire des Patriotes v. Distributeur Tapico Ltée17, the Court of Appeal ultimately overturned a judgment of the Superior Court which concluded that, absent a stipulation for a third party, the project owner became liable towards a subcontractor by paying the general contractor without insisting on the subcontractor's acquittance, as the master contract allowed it to do.

According to the Court of Appeal, and despite the use of the verb "must" in the clause at issue, the project owner was not obliged to insist on receiving the subcontractor's acquittance and had not committed any fault towards it. The Court did not however make any express pronouncement on the trial judge's conclusion regarding the absence of a stipulation for a third party. It should be noted again that the subcontractor was entitled to a legal hypothec in this case, which appears to have been determinative in the Court's decision.

In our view, in circumstances where, in addition to such a clause in the master contract, there is no entitlement to a legal hypothec on the part of the subcontractor and knowledge on the part of the project owner, before payment by it to the general contractor, that the subcontractor has not been paid by the general contractor, the Court of Appeal would have arrived at a different conclusion, and the project owner's failure to make the withholding allowed under the master contract would have rendered it liable towards the subcontractor. Otherwise, the burden of proof applicable to contractual liability would become confused with that applicable to a stipulation for a third party.

In addition, the subcontractor's entitlement to a legal hypothec appears to us to have been determinative in the matter of LML Électrique (1995) Ltée v. 9129 Québec Inc.18, where the Court of Québec concluded that as the subcontractor had not exercised its hypothecary rights within the prescribed period, the owner was entitled to assume that it had been paid.

This aspect was also raised by the Court in Acier d'Armature Ferneuf c. Giguère et Geoffroy19 :

Undertakings of this nature are particularly appropriate in cases where contractors have no other protection because the project involves property appropriated to public utility ... and they are thus deprived of the right to charge it with a legal hypothec.

Finally, we are also of the view that it would be possible for the subcontractor to argue, in similar circumstances where notice has also been given to the project owner of the relevant provisions of the subcontract, that the owner is liable on the basis of extra-contractual liability, based on the Supreme Court of Canada's decision in Trudel v. Clairol20. The subcontractor could thus maintain that by paying the general contractor knowing that it was in default vis-à-vis its subcontractor, when the master contract allowed it to withhold an equivalent amount, the project owner became liable on the basis that it was participating in or encouraging the breach of the subcontract.

Conclusion

A subcontractor who exercises a personal recourse against the project owner must, on pain of dismissal of its claim, base its recourse on either a mandatory provision of the master contract constituting a stipulation for a third party, or a discretionary provision (under the master contract or Article 2123 of the Civil Code where applicable) combined with specific allegations of fact indicating fault on the part of the project owner. Circumstances such as the absence of the subcontractor's entitlement to a legal hypothec, as well as notice of non-payment by the general contractor having been given by the subcontractor to the project owner before the latter has paid the corresponding amount to the general contractor, will considerably improve the chances of success of such a recourse.

Footnotes

1 As opposed to a hypothecary recourse.

2 Or a solemn declaration from the general contractor to that effect.

3 2015 QCCA 1034

4 J.E. 2002-1243 (C.Q.)

5 2015 QCCA 1850

6 2008 QCCS 5409

7 [1992] 2 S.C.R. 554

8 Supra, note 4

9 2015 QCCQ 10297.

10 2011 QCCS 3427.

112011 QCCS 5788.

12 LML Électrique (1995) Ltée v. 9129 Québec Inc., 2008 QCCQ 1795

13 Supra, note 11.

14Supra, note 4.

15The Superior Court did not however criticize the other conclusions of the Court of Québec in this case.

16 This provision presupposes however that the right to the hypothec exists.

17 AZ-03019131 (05-29-2003, C.A).

18 Supra, note 12

19 Supra, note 4

20 [1975] 2 S.C.R.. 236

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