Canada: Supplier Beware: Appropriate Payments At Your Own Risk

Liteco v Nova Scotia (Transportation and Infrastructure Renewal), 2017 NSSC 304

Whether you're a general contractor, a subcontractor, or a supplier, this decision regarding the application of the Builders' Lien Act is important for your business.

In this case, a general contractor (the "GC") hired an electrical subcontractor (the "Sub") on a project to build a school for the Province of Nova Scotia. The Sub sourced its electrical supplies from a third party supplier (the "Supplier").

Before the Supplier would give materials to the Sub, it required the GC's agreement to pay the Sub by way of cheques made out to the Sub and the Supplier jointly (the "Joint Cheque Agreement"). The GC agreed.

The first cheque was made out jointly, but the rest were made out to the Sub alone; however, the Sub actually did pay money over to the Supplier each time it received a cheque from the GC: it either endorsed the payments over to the Supplier directly, or deposited the cheques itself and issued new cheques to the Supplier out of those funds. The Supplier did not object.

The school was the only project that the Sub and the Supplier had ongoing at the time, but the Sub had other outstanding accounts with the Supplier from past projects. Most importantly:

  • The Supplier accepted, and deposited, more than it was owed on the project from the GC (through the Sub);
  • The Supplier knew that only the first cheque adhered to the Joint Cheque Agreement, but accepted the money regardless;
  • The Supplier applied the majority of that money to other, older, unrelated debts of the Sub; and
  • The Supplier then liened the school and tried to claim the project debt from the GC, saying it was never paid on the project in the first place.

The Supplier was not a party to the Joint Cheque Agreement (only the GC and the Sub were), so the Supplier had no argument in contract. Despite this, the Supplier relied on an old legal doctrine called "equitable assignment", which holds that where a debtor is directed to pay a creditor's money to a third party, but fails and pays the creditor instead, and the creditor runs away with the funds, the debtor may have to pay third party again (i.e., may be liable to pay the debt twice).

Before this case, there was no law in Nova Scotia on how (if at all) the doctrine of equitable assignment applied to liens and construction cases. In this decision, Justice Robertson of the Supreme Court answered two questions:

  1. When a creditor (the Sub) assigns its debt to a third party (the Supplier) by way of an equitable assignment, is the debtor (the GC) liable to pay the assignee if:
    1. it has already directly paid the creditor more than the amount of the creditor's debt to the assignee, and
    2. the creditor has actually already paid the assignee in full, and
    3. the assignee accepted those payments directly from the assignor/creditor, contrary to the terms of the equitable assignment agreement?

    The answer to Question 1 was "no": because the Sub had paid over more than the Supplier was actually owed on the project, there was no debt for the GC to pay. In other words, a third party can only claim under equitable assignment if it had not, in fact, been paid in the first place. In this case, the Supplier was paid (even though it put the money towards other debts).

  2. Is a supplier permitted to apply payments from a contractor on a project pursuant to the Builders' Lien Act to other older, unrelated debts owed by the contractor, and then claim a lien on the project lands?

The answer to Question 2 was also "no": because the funds from the GC to the Sub – and then from the Sub to the Supplier – were impressed with a trust under sections 44B(1) and 44B(2) of the Builders' Lien Act, and because the Supplier knew this, the Supplier was not allowed to appropriate them to other debts and then lien on the project to which the trust related.

The takeaway is this: suppliers appropriate project funds to other debts at their own risk! They cannot take advantage of the Builders' Lien Act lien provisions if they have done so. General contractors can rely on the protections of the Act's trust provisions in the case of lien claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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