Canadian Natural Resources Limited v Thermal Energy Service Inc, 2017 ABQB 698

Court of Queen’s Bench of Alberta Citation: Canadian Natural Resources Limited v Thermal Energy Service Inc, 2017 ABQB 698 Date: 20171115 Docket: 1601 07565 Registry: Calgary Between: Canadian Natural Resources Limited Applicant - and - Thermal Energy Services Inc., 957447 Alberta Ltd. operating as NWS Construction Pyramid Corporation, Metalcare Group Inc., Comeau's Inspection Service Inc., Rothlochston Industrial Inc., West Rentals & Sales GP Inc. and JLP Industries Inc. Respondents _______________________________________________________ Reasons for Judgment of J.T.

Prowse , Q.C., Master in Chambers _______________________________________________________ [ 1 ] This action involves an owner of an oil sands facility, Canadian Natural Resources Limited (“CNRL”), which is faced with conflicting demands to $815,000 which it says is payable to its (now bankrupt) general contractor, Thermal Energy Services Inc. (“Thermal”).

[2] One demand is from Her Majesty the Queen in right of Canada as represented by the Minister of National Revenue(“MNR”). [3] MNR claims $558,000 of this amount said to be owing from CNRL to Thermal. [4] MNR’s claim arises from two statutory provisions. [5] The first MNR claim is a ‘deemed trust’ claim based on section 227(4) and (4.1) of the Income Tax Act, R.S.C. 1985 (5th Suppl.) (the “ITA”). [6] The second MNR claim us an ‘enhanced requirement to pay’ claim based on section 224(1.2) of the ITA (and identicallyworded provisions of the Employment Insurance Act, SC 1996, c.23, and the Canada Pension Plan Act, RSC 1985, c.C-8). [7] The same $815,000 is claimed by various lienholders, who say their liens can only be discharged on payment of thatamount, as it represents CNRL’s 10% hold back from Thermal’s construction draws. [8] The largest lienholder, who attended and participated in these proceedings, is Rothlochston Industrial Inc. (“RLI”).

RLI fileda lien because it was not paid for work done under subcontract to Thermal. [9] RLI presents two alternative arguments on behalf of the lienholders. [10] First, RLI argues that the claims of MNR to any portion of the holdback are invalid. [11] Alternatively, RLI argues that, if the claim of MNR to some of the holdback funds is valid, then the resulting loss of $558,000should be borne by CNRL.

RLI says that, even after CNRL has paid $558,000 to MNR, CNRL is nevertheless obligated to top up thelien fund by that amount in order that the full lien fund of $815,000 be paid into court to the credit of the lienholders in order to obtaindischarges of their liens. [12] For the reasons which follow I rule in favour of MNR and CNRL, and against RLI and the other lienholders. I direct thatCNRL pay the lien holdback of $815,000 into court, that $558,000 be released from court to MNR, and that the lienholders are restrictedto the remaining $257,000. Upon payment into court the liens shall be discharged.

Analysis and case law [13] The following cases uphold the priority of MNR over lienholders when there are not sufficient funds for both MNR and thelienholders: TransGas Ltd. v Mid-Plains Contractors Ltd., (SK CA), [1993] 4 W.W.R. 337, CarswellSask 414(S.C.C.); Japan Canada Oil Sands Ltd. v Stoney Mountain Steel Corp., (AB KB), 2001 CarswellAlta 732 (Q.B.);South Rock Ltd. v Omni General Construction Ltd., 2002 CarswellAlta 2020 (Q.B.); Ledcor Construction Limited v 544033 B.C. Ltd.,2006 BCSC 2097, 2006 CarswellBC 3784; W.

Mullner Trucking Ltd. v Baer Enterprises Ltd., 2010 BCCA 90, 2010 CarswellBC 371;Okanagan Regional Library v Isaak Electrical Ltd., 2013 BCSC 953, 2013 CarswellBC 1566. [14] RLI’s primary argument against MNR’s asserted priority is based on the assertion that CNRL does not contractually owefunds to Thermal, so that MNR’s deemed trust and enhanced requirement to pay have nothing to attach to. [15] I can illustrate RLI’s argument with the following hypothetical situation. [16] Assume an owner has an improvement constructed on its land, but through carelessness in monitoring progress payments, itmakes progress payments of $600,000 to a general contractor, when in fact the value of the work done was only $500,000.

The generalcontractor then goes bankrupt. At common law the owner would owe nothing to the general contractor, in fact the general contractorwould owe the owner an overpayment reimbursement of $100,000. [17] Assume the general contractor did the work itself and did not subcontract, or alternatively paid any subcontractors in full, sono builders’ liens were filed. [18] If MNR notified the owner that it was asserting a deemed trust claim and an enhanced requirement to pay claim, MNR’sclaims would fail. [19] Claims from MNR claim can only attach a receivable which exists.

If no money is owed to the general contractor, noreceivable exists. [20] Now let us change the hypothetical situation only to the extent that the general contractor did not pay its subcontractors, andbuilders’ liens were filed. Again, the scenario is that the general contractor has been overpaid. [21] Can MNR now attach a ‘receivable’ which does not exist at common law, but is essentially ‘deemed’ to exist under theBuilders’ Lien Act (“BLA”) for the benefit of lienholders, and attach this ‘deemed’ receivable ahead of the lienholders?

Were it not forthe BLA no receivable would exist. [22] I say that the receivable is deemed to exist for the benefit of lienholders because the provisions of the BLA, and the casesinterpreting those provisions, make it clear that an owner must pay a lien fund into court even though, at common law, it does not in factowe anything [see Belanger v Pointer Construction Group Ltd., 1984 CarswellAlta 65 at para 50; Parizeault v Pointer ConstructionGroup Ltd., (AB KB), 1984 CarswellAlta 67 at para 22; UPA Construction Group Ltd.

Partnership v Lake PlacidProperties (Park) Inc., 2010 ABQB 675, 2010 CarswellAlta 2133 at para. 18]. [23] It might be argued that MNR is taking advantage of a provincial scheme for priority amongst creditors (the BLA) in order to

maintain that a receivable exists, and then switching to the federal scheme of priorities in order to capture the receivable. [ 24 ] In Agricultural Financial Services Corp. v Redmond , 1999 CarswellAlta 487, 1999 ABCA 175 , the court ruled that, in the circumstances of that case, by taking advantage of legislation the crown will be treated as having assumed the attendant burdens.

For the reasons set out in the paragraph below I need not decide whether that case applies to the situation at hand. [ 25 ] The discussion above is based on a hypothetical situation where the owner does not owe anything to the general contractor at common law. In this case, Thermal completed its contract with CNRL, and Thermal was therefore owed the 10% holdback in the amount of $815,000 at common law. MNR’s attachment of that receivable (to the extent of MNR’s claim of $558,000) is therefore valid.

Is CNRL or RLI (and the other lienholders) to bear the loss? [ 26 ] As noted previously, RLI’s alternative argument is that, if the claim of MNR to holdback funds is valid, then the resulting loss of $558,000 paid to MNR should be borne by CNRL. In other words, CNRL would be compelled to pay $558,000 to MNR and then pay a further $815,000 to discharge the liens. [ 27 ] I do not agree with RLI’s alternative argument. [ 28 ] There is one receivable owing to Thermal. It would have gone to the lienholders if not for Thermal breaching its obligations under the ITA, leading to enforcement proceedings by MNR.

Once that receivable (or in this case a portion of it) is successfully attached by MNR it seems to me wrong in principle to resurrect that receivable again and force CNRL to pay twice. [ 29 ] I have the greatest of sympathy for the lienholders, and realize that the application of this ruling in future cases may end up in the bankruptcy of some small lienholder who was relying on the receivable to stay in business. However, some innocent party (either CNRL or the lienholders) must bear the loss and I know of no doctrine of law which would allow me to compel CNRL to pay the same receivable twice.

Costs [ 30 ] If the parties cannot agree on costs, they may approach me for a ruling in that regard. Heard on the 7 th day of November, 2017. Dated at the City of Calgary, Alberta this 15 th day of November, 2017. J.T. Prowse, Q.C. M.C.C.Q.B.A. Appearances: Brent W. Mescall Parlee McLaws LLP for the Applicant Canadian Natural Resources Limited David Penner Gall Legge Grant Zwack LLP for the Respondent RLI Jill Medhurst Department of Justice Canada

for the Minister of National Revenue