Prestige Commercial Interiors, 2018 SKCA 95

Court of Appeal for Saskatchewan Docket: CACV3238 Citation: Prestige Commercial Interiors

(1992) Ltd. v Suderman,2018 SKCA 95Date: 2018-12-06Between:Prestige Commercial Interiors

(1992) Ltd.Appellant(Plaintiff)AndRichard James Suderman, Joseph Schillaci, Imran Chowdry, Prairie Green Restaurant (Southland) Holdings Limited, AbacusDesign Build and Project Management Inc., Paul Patille, Alfredo Moreira Respondents(Defendants)AndAll-Rite Plumbing & Heating Ltd., Anlin Welding & Steel Fabrication Ltd., Raven Roofing (Sask) Ltd., CP Distributors Ltd., 101198162Saskatchewan Ltd. carrying on business as Regina Tent and Awning, Memo Construction Ltd., PNG Construction Co., Smith-BuiltConcrete, Framing & Construction Ltd., Prairie West Interiors

(1997) Inc., Gibson Energy ULC, Express Electric Inc., Canwest Propane,Clearlite Glass Ltd., Tata Interiors Ltd., Westcor Contracting Ltd., Pro Tradesman Storage & Transportation Ltd., Ed’s Backhoe ServiceInc.Non-Parties(Defendants)Before: Ottenbreit, Caldwell and Whitmore JJ.A.Disposition: Appeal dismissedWritten reasons by: The Honourable Mr. Justice CaldwellIn concurrence: The Honourable Mr. Justice Ottenbreit The Honourable Mr.

Justice WhitmoreOn Appeal From: 2018 SKQB 93, ReginaAppeal Heard: October 10, 2018Counsel: Nathan Phillips and Mervin Phillips for the Appellant Deron Kuski, Q.C. and Katlyn Cooper for the Respondents Caldwell J.A. I. introduction [1] Although Prestige Commercial Interiors

(1992) Ltd. [Prestige] has raised several grounds of appeal, it conceded in thehearing before us that its appeal turns on an overarching question of law. The question before the Court is: Must a plaintiff have a directcontractual relationship with the trustee to claim as a beneficiary of a trust constituted under ss. 6, 7, or 8 of The Builders’ Lien Act, SS1984-84-86, c B-7.1? [2] The Court of Queen’s Bench Chambers judge who heard this matter interpreted The Builders’ Lien Act as requiring privityof contract and dismissed Prestige’s claim against the directors of Prairie Green Restaurant (Southland) Holdings Limited [Prairie Green](Prestige Commercial Interiors

(1992) Ltd. v Prairie Green Restaurant (Southland) Holdings Limited, 2018 SKQB 93). Havingreviewed the legislation and other materials to determine the intention of the Legislature, I find the Chambers judge did not err in herinterpretation of The Builders’ Lien Act. The appeal must be dismissed. II. background [3] As the question before the Court is one of law, I do not propose to revisit the Chambers judge’s findings of fact.

It issufficient to understand that this matter came before the Chambers judge on an application by Prairie Green to have a breach of trustclaim that Prestige had brought against Richard James Suderman, Joseph Schillaci and Imran Chowdry [PG Directors] summarilydismissed on the basis that it disclosed no genuine issue for trial (Hryniak v Mauldin, 2014 SCC 7, [2014] 1 SCR 87).

The claim hadsought to engage the PG Directors’ personal liability under s. 16 of The Builders’ Lien Act for breach of the owner’s trust establishedunder s. 6 of that Act. [4] In her reasons, the Chambers judge relied on Graham Construction and Engineering

(1985) Ltd. v Weyburn (City) (1989), (SK KB), 81 Sask R 8 (QB) at para 19 [Graham], for the proposition that the “essential connecting link between eachtrustee and the beneficiaries of the trust is privity of contract.” On the facts of this case, Prestige had been subcontracted by AbacusDesign Build and Project Management Inc., who itself had a contract with Prairie Green, but there was no privity of contract betweenPrestige and Prairie Green.

The trial judge also observed that Prestige had “failed to put forward evidence that [the PG Directors]committed a breach of trust.” She therefore concluded “there is no genuine issue for trial on Prestige’s claim of breach of trust by [thePG Directors].” III. analysis

[5] The framework for the analysis of the question of law in this appeal is the modern principle of statutory

interpretation (Rizzo& Rizzo Shoes Ltd. (Re), (SCC), [1998] 1 SCR 27 at para 21), namely, the words of The Builders’ Lien Act are to beread in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act and the intention of theLegislature. A. Legislation [6] The relevant provisions of The Builders’ Lien Act are as follows:

Interpretation 2(1) In this Act: … (a.1) “contract” means the contract between the owner and contractor and includes any amendment to that contract; (b) “contractor” means a person contracting with or employed directly by the owner or his agent to provide services or materials to animprovement, but does not include a labourer; … (h) “improvement” means a thing constructed, erected, built, placed, altered, repaired, improved, added to, dug or drilled or intended tobe constructed, erected, built, placed, altered, repaired, improved, added to, dug or drilled on or into, land, except a thing that is notaffixed to the land or intended to become part of the land and includes: (

i) landscaping, clearing, breaking, excavating, digging, drilling, tunnelling, filling, grading or ditching of, in, on or under land; (ii) the demolition or removal of any building, structure or works or part thereof; (iii) services provided by an architect, engineer or land surveyor; and “improved” has a corresponding meaning; (i) “labourer” means a person who is employed for wages to perform labour of any kind, whether employed under a contract of serviceor not; (j) “materials” means every kind of movable property that becomes or is intended to become, part of the improvement, or that is used tofacilitate directly the making of the improvement; (k) “owner” includes a person having an estate or interest in land, other than an encumbrance, at whose request, express or implied, and: (

i) on whose credit; (ii) on whose behalf; (iii) with whose privity and consent; or (iv) for whose direct benefit; an improvement is made to the land; … (q) “services” means any labour done or service performed on or in respect of an improvement and includes the rental of equipment andthe wages of any operator provided with the equipment; (r) “services or materials” includes both services and materials; (s) “subcontract” means any agreement between the contractor and a subcontractor, or between two or more subcontractors, relating tothe provision of services or materials and includes any amendment to that agreement; (t) “subcontractor” means a person, not contracting with or employed directly by an owner or his agent, but who provides services ormaterials to an improvement under an agreement with the contractor or under him with another subcontractor, but does not include alabourer; … Owner’s trust 6(1) All amounts received by an owner, other than the Crown, that are to be used in the financing of an improvement, including thepurchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the landand prior encumbrances, a trust fund for the benefit of the contractor.

(2) Where the owner provides his own capital or where the owner is the Crown, and where amounts become payable under a contract to

a contractor, the moneys in the hands of the owner or received by him for payment under the contract at any time thereafter constitute a trust fund for the benefit of the contractor.

(3) Where the owner’s interest in an improvement is sold by the owner, an amount equal to the positive difference between: (

a) the value of the consideration received by the owner as a result of the sale; and (

b) the reasonable expenses arising from the sale and the amount, if any, paid by the vendor to discharge any encumbrances which are entitled to priority under this Act; constitutes a trust fund for the benefit of the contractor.

(4) The owner is the trustee of the trust fund created by subsections (1) to (3), and he shall not appropriate or convert any part of the trust fund to his own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to him by the owner. Contractor’s trust 7

(1) All amounts: (

a) owing to a contractor, whether or not due or payable; or (

b) received by a contractor; on account of the contract price of an improvement constitute a trust fund for the benefit of: (

c) subcontractors who have subcontracted with the contractor and other persons who have provided materials or services to the contractor for the purpose of performing a contract; and (

d) labourers who have been employed by the contractor for the purpose of performing the contract.

(2) The contractor is the trustee of the trust fund created by subsection (1) and he shall not appropriate or convert any part of the trust fund to his own use or to any use inconsistent with the trust until all persons for whose benefit the trust is constituted are paid all amounts related to the improvement owed to them by the contractor. Subcontractor’s trust 8

(1) All amounts: (

a) owing to a subcontractor, whether or not due or payable; or (

b) received by a subcontractor; on account of the subcontract price of an improvement constitute a trust fund for the benefit of: (

c) subcontractors who have subcontracted with the subcontractor and other persons who have provided materials or services to the subcontractor for the purpose of performing the subcontract; and (

d) labourers who have been employed by the subcontractor for the purpose of performing the subcontract.

(2) The subcontractor is trustee of the trust fund created by subsection (1) and he shall not appropriate or convert any part of the trust fund to his own use or to any use inconsistent with the trust until all persons for whose benefit the trust is constituted are paid all amounts related to the improvement owed to them by that subcontractor. … Liability for breach of trust by corporation 16

(1) Where a corporation is constituted a trustee by this Part, in addition to the persons who are otherwise liable in an action for breach of trust: (

a) every director or officer of the corporation; and (

b) any person, including an employee or agent of the corporation who has effective control of the corporation or its relevant activities; who assents to, or acquiesces in, conduct that he knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust.

(2) The question of whether a person has effective control of a corporation or its relevant activities is one of fact and, in determining that question, the court may disregard the form of any transaction and the separate corporate existence of any participant.

(3) All persons who are found liable or have admitted liability for a particular breach of trust under this Part are jointly and severally liable.

(4) A person who is found liable, or who has admitted liability, for a particular breach of a trust under this

Part is entitled to recover contribution from any other person also liable for the breach in an amount to be determined by the court.

None of these provisions have been amended since enactment. B. Grammatical and ordinary sense [7] As can be seen, the relevant provisions of The Builders’ Lien Act are detailed but relatively straightforward in their terms.Taking the defined terms into account and recognising the trusts must pertain to an improvement, the operative provisions of ss. 6(1), (2)and (3), for example, each refer to the establishment of a trust fund “for the benefit of the contractor.” No other beneficiary is mentioned.Under s. 6(4), the owner is declared to be the trustee of the trust fund. No other trustee is mentioned.

Section 6(4) then prohibits theowner qua trustee from appropriating or converting any part of the trust fund to its own use or to any use inconsistent with the trust “untilthe contractor has been paid all amounts … owed to him by the owner.” No other parties are mentioned. [8] In the same way, s. 7 constitutes a trust fund (s. 7(1)) to be held by a contractor as trustee (s. 7(2)) for a limited class ofbeneficiaries, namely, subcontractors “who have subcontracted with the contractor” (s. 7(1)(c)), “other persons who have providedmaterials or services to the contractor for the purpose of performing a contract” (s. 7(1)(c)), and “labourers who have been employed bythe contractor for the purpose of performing the contract” (s. 7(1)(d)).

Section 7(2) prohibits the contractor/trustee from appropriating orconverting any part of the trust fund to its own use or to any use inconsistent with the trust “until all persons for whose benefit the trust isconstituted” have been paid all amounts owed to them by the contractor. [9]

Section 8, dealing with the subcontractor’s trust, contains nearly identical language to the s. 7 contractor’s trust, but movesthe role of trustee and the class of beneficiaries one step further down the construction pyramid. [10] Based on the provisions themselves and the statutory

definitions, I find ss. 6, 7 and 8 of The Builders’ Lien Act are drafted inunambiguous language that indicates an intention to create three distinct and separate trusts. The first is an owner’s trust under which theowner serves as sole trustee and the contractor engaged by the owner is the sole beneficiary.

The second is a contractor’s trust underwhich the contractor serves as sole trustee and subcontractors and others who contract directly with the contractor are the beneficiaries.The third is a subcontractor’s trust under which a subcontractor to a contractor serves as sole trustee for the benefit of all persons whohave contracted with the subcontractor.

Notably, the statutory language allows for the establishment of multiple owner’s, contractor’sand subcontractor’s trusts in respect of a single improvement, depending on the contractual relationships arising in respect of theimprovement. [11] That is, in their ordinary and grammatical sense, the trust provisions of The Builders’ Lien Act adopt the principle of privity ofcontract and privity of trust. I turn now to consider whether this

interpretation is consistent with the scheme of the Act and the intentionof the Legislature. C. Overall purpose of the legislation [12] The courts have been called upon to interpret The Builders’ Lien Act on many previous occasions. As such, the overallpurpose of the legislation is well-identified and well-understood. In Axcess Capital Partners Inc. v Allsteel Builders(2) Limited, 2015SKCA 33, 383 DLR (4th) 334 [Axcess Capital], Jackson J.A. wrote: [57] Two factors dictate the Legislature’s approach to construction lien legislation.

The first factor is that, unlike any othercommercial endeavour, the work, services and materials supplied to an improvement are provided on credit. The second factor is that theordinary law of contract does not provide sufficient remedies to ensure that (

i) funds flow from the top of the construction pyramid; and(ii) work, services and materials flow from the bottom. The statute supplements the law of contract and fosters the provision of credit in acomplex piece of legislation designed to assist and facilitate construction. (See Gary G.W. Semenchuck, Q.C. et. al, Liens in theConstruction Industry: A Report Prepared for The Hon. J. Gary Lane, Q.C., Minister of Justice by The Special Advisory Committee tothe Minister of Justice on Builders’ Liens (Regina: Saskatchewan Justice, August 1984) at i-ii.) [58] With respect to purpose, the statute has two concerns: (

i) the protection of those who provide services and materials on credit,and (ii) the protection of the commercial interests of others, including the owner and the financier of the improvement. This Court has,however, consistently emphasized that “the principal object of this Act is to better ensure that those who contribute work and material tothe improvement of real estate are paid for doing so” (see Hansen v Canadian National Railway Co. (1983), (SKCA), 22 Sask R 126 at para 30). [59] Since The Builders’ Lien Act was enacted in 1986, this Court has commented on the purpose of the Act on several occasions. InTown-N-Country Plumbing & Heating

(1985) Ltd. v Schmidt (1991), (SK CA), 93 Sask R 278 (CA) at para 27[Town-N-Country], Cameron J.A. for the Court mentioned both purposes, including that the statute is “concerned with the commercialinterests of others, including the owner and the financier, if any, of the improvement”. He stressed that the “statute is primarilyconcerned with the commercial interests of persons who, under contract and on credit, contribute service or material to the improvementof real property, whether under contract to the owner, to the contractor engaged by the owner, or to any subcontractor” (para. 26).

As tohow the two purposes interact with each other, he noted importantly that “both purposes may be seen to run through the scheme of thestatute” (para. 28). [60] This Court also considered the purpose of The Builders’ Lien Act in BWV Investments Ltd. v Saskferco Products Inc. (1994), (SK CA), 125 Sask R 286 (CA) [Saskferco]. Gerwing J.A., for the Court, reproduced the above quoted paragraphsfrom Town-N-Country. In addition, at paras. 31 and 33 of Saskferco, Gerwing J.A. cited with approval a decision from the BritishColumbia Court of Appeal: Defazio Bulldozing & Backhoe Ltd. v W.A.

Stephenson Construction (Western) Ltd. (1986), (BC CA), 28 DLR (4th) 291 (BC CA) [Defazio], which considered their Builders’ Lien Act, RSBC 1979, c 40. At p. 293 ofDefazio, the British Columbia Court of Appeal commented on the purpose of the statute: [4] Clearly, the purposive intent of the legislature in enacting the Act is to preserve, primarily through the trust provisions (s. 2) and theholdback provisions (s. 20), and to direct the contract moneys for the “improvement”, whether coming from the “owner” or a mortgagee

advancing a building loan, to “persons” entitled thereto as having contributed “work” and “material” to the making of the “improvement”and to prevent the “owner” from getting the benefit of “work” and “material” without paying for it. (Emphasis added) See also D & K Horizontal Drilling

(1998) Ltd. (Trustee of) v Alliance Pipeline Ltd., 2002 SKCA 145 at para 14, 227 Sask R 250. [13] Although largely reiterated in Axcess Capital, in the Court’s earlier decision in Town-N-Country Plumbing & Heating (1985)Ltd v Schmidt (1991), (SK CA), 93 Sask R 278 (CA) [Town-N-Country], Cameron J.A. had written: [26] The statute is primarily concerned with the commercial interests of persons who, under contract and on credit, contribute serviceor material to the improvement of real property, whether under contract to the owner, to the contractor engaged by the owner, or to anysubcontractor.

According to the law of contract, such persons have no recourse against the property should they go unpaid, and norecourse against anyone except the party with whom they have contracted. Limited as they are in those ways, the rights and remediesafforded by contract law were seen by the legislature as inadequate in this context, and so, an elaborate scheme of supplementary rightsand remedies was enacted, all with the purpose of better enabling such persons to recover the amounts owing to them.

This is the primarypurpose of the Act, and to the end of achieving that purpose, trusts were constituted in relation to amounts payable in connection with theimprovement; liens and charges of various kinds were created; holdbacks and retentions of moneys payable were provided for, and soon. [28] This, however, is not the only concern or purpose of the Act. It is also concerned with the commercial interests of others,including the owner and the financier, if any, of the improvement.

In their interests, as well as in the interests of the contractor and thesubcontractors, extensive provision was made allowing for moneys to flow down the contractual chain without risk of liability to thoseproviding the materials or services. The purpose of these provisions -- and hence the secondary purpose of the Act -- is to ensure businessefficacy. [29] Both purposes may be seen to run through the scheme of the statute, including

Part II, containing the trust provisions, but sincethese provisions are not in issue nothing need be said of them. [14] Picking up where Cameron J.A. left off in Town-N-Country, this appeal asks the Court to determine how the scheme of TheBuilders’ Lien Act carries through the trust provisions of that statute. Helpfully, L.P.

Ettinger in “Trusts in the Construction Industry”(1989) 27 Alta L Rev 390 [Construction Industry Trusts], identified the advantages and disadvantages of imposing privity of trust underbuilders’ lien legislation (at 416): … The two main advantages of imposing privity of trust on a builders’ lien trust scheme are: 1) simplicity for the trustee in that heknows exactly who the beneficiaries of the trust are (those with whom he has contractual privity), and 2) it maintains an orderly flow offunds down the chain.

A further argument in favour of privity of trust is that there is no need for a trustee to owe a duty to anyone furtherdown the chain who might be affected by a breach of trust committed by someone other than the trustee because that person down thechain can file a lien if he wants to stop the flow of funds. The main disadvantage of the privity of trust doctrine is its rigidity in that asub-subcontractor or supplier way down the chain has limited ability to bring an action to enforce a trust further up the chain or attachmoneys further up the chain.

Instead the sub-subcontractor or supplier must wait for funds to “trickle down”. If a link in the chain isbankrupt or insolvent before receiving trust funds, those further down must wait for a trustee in bankruptcy or receiver to be appointedand then run the risk of having to fight with the trustee in bankruptcy or receiver over what funds are subject to the trust. Also, in theevent a link in the chain fails to take action to enforce the trust of which he is a beneficiary, others down the chain may face difficultiesin bringing an action to enforce a trust of which they are not direct beneficiaries.

Either they may not be permitted to enforce a trust ofwhich they are not beneficiaries or the court may find itself standing on its head and straining the facts in order to find privity of contractwhere none really exists. … [15] That is, privity of contract fits within the scheme of The Builders’ Lien Act because it promotes the flow of trust funds downthe construction pyramid. This is best explained by considering the alternative. In the absence of privity of contract or of trust, asubcontractor could bring an action under the owner’s trust directly against the owner.

While this could facilitate resolution of thatsubcontractor’s claim, such an action could have the practical effect of forestalling the owner from making further payments to thecontractor. For example, without privity of contract, if a contractor failed, for whatever reason, to pay the drywall subcontractor for workdone on an improvement, the drywall subcontractor could bring an action directly against the owner, attaching monies held in trustpursuant to s. 6.

This might well interrupt the advance of those funds by the owner to the contractor, which in turn might deter thecontractor from completing the improvement or from paying the framer, painter and plumbing subcontractors and the contractor’ssuppliers. In this way, in the absence of a requirement for privity of contract, a single dispute between contractor and subcontractor couldeffectively stop the flow of funds down the construction pyramid to other subcontractors, suppliers and labourers who were unaffectedby the subcontractor’s dispute with the contractor. [16] In a similar way, the trust provisions in

Part II of The Builders’ Lien Act also ensure that third parties to the improvement (i.e.,judgment creditors) do not interfere with the flow of funds down the construction pyramid (see: W. Brent Gough and Colin K.Hirschfeld, Saskatchewan Builders’ Lien Manual, 2d ed (Regina: Law Society of Saskatchewan Library, 2014) at 2 [Lien Manual]). [17] Further, the subcontractor in the scenario above is not without other statutory remedies.

As Jackson J.A. observed in AxcessCapital, the Legislature designed The Builders’ Lien Act in such a way that the lien and holdback provisions allow subcontractors to getaround the difficulties associated with obtaining or enforcing traditional contractual remedies in the absence of privity of contract. [18] Therefore, in my assessment, a requirement for privity of contract or of trust under ss. 6, 7 and 8 may be read harmoniouslywith the scheme of The Builders’ Lien Act because it operates to protect the balance struck by the Legislature between an owner’scommercial interests and the commercial interests of persons who contribute materials and services to the owner’s improvement.

D. The Lien Report

[19] The conclusion that the theory of privity of contract and of trust is consistent with the scheme of The Builders’ Lien Act issupported by a review of Liens in the Construction Industry—A Report Prepared for The Hon. J.

Gary Lane, Q.C., Minister of Justice,(Regina: Ministry of Justice, 1984) [Lien Report], where the Special Advisory Committee to the Minister of Justice on Builders’ Liens[Lien Committee[1]] made the following comments about the draft trust provisions for the proposed Act (at 2): A number of briefs received by the Committee indicated confusion in the industry as to how the trust and the lien interact. TheCommittee concluded that the trust and the lien are alternative remedies. To speak of a lien claimant asserting a claim to trust funds istheoretically incorrect.

The trust is designed to ensure that funds earmarked for a project are not siphoned off for some other purpose. Inthis regard, the position of the trust sections in the Act is important. These sections are the starting point for a successful project just asthey are the commencement of the Act. If there is compliance with these sections the construction project has a greater chance ofsuccess. The remedy to enforce the trust is to bring an action for breach of trust and, as will be seen, it is only those persons in directcontractual relationship with the trustee who can bring such an action.

The lien is distinct from the trust. It is really a misnomer to speakof registering a lien to claim on the trust funds. … The main purpose for the creation of the trust is to ensure that moneys that are in the construction pyramid for the purposes of theimprovement are kept in the pyramid. In this regard, the vehicle of the trust is immensely suited. Monies held by a trustee should not bethe subject matter of a garnishee summons or other debt enforcement mechanisms.

A trustee who makes an assignment in bankruptcycannot be divested of money held for his beneficiaries. ... (Emphasis added) [20] The Lien Committee went on to review the then extant trust provisions of The Mechanics’ Lien Act, RSS 1978, c M-7(repealed), commenting that (at 4–5): Due to the overlap in each of the subsections creating trusts, it is not readily apparent that there must be privity of contract in order for abeneficiary to make a claim upon a trustee.

However, all of the reported decisions squarely dealing with the question of privity have heldthat privity of contract, and therefore of trust, must exist between the beneficiary and his trustee. In Saskatchewan, the authority on pointis Western Supplies Limited v. Cana Construction Company, (SK KB), [1976] 1 W.W.R. 289 (Sask. D.C.). Althoughthis case involved the

interpretation of The Public Works Creditors’ Payment Act, and the trust provisions therein, the sections wereidentical to the present Mechanics’ Lien Act. The Committee found this

interpretation of the trust sections to be acceptable and felt thesections should be drafted to reflect the need for privity. [21] As the Lien Report makes clear, the proposed trust provisions were drafted to require privity of contract between trustee andbeneficiary (at 6–7): As mentioned, the sums discussed in subsection 3(1) remain trust funds until all workmen, etc., are paid. The Committee found that ifthis obligation were interpreted literally the trustee would be placed in an impossible position.

It gives the impression that the trusteemust see to the payment of workmen, etc., who may not be in direct contractual relationship with the trustee. Accordingly, theCommittee felt that the legislation should make it clear that the obligation of the trustee is ended as soon as payment is made to thosepersons contracting directly with the trustee. [22] In particular terms, the Lien Committee made the following recommendations respecting the trust provisions of the proposednew Builders’ Lien Act (at 10): 1. There must be privity of contract between a trustee and his beneficiary. 2.

There should be no trust for the payer of trust moneys. 3. The trust should terminate upon payment to the beneficiary. 4. The Act should clearly constitute a trust in the owner’s hands of money borrowed for a project or, in the case of the Crown or wherethe owner receives money otherwise than through borrowing, when the moneys are due and payable under the project. 5. The Workers’ Compensation Board should not be constituted a trust beneficiary. [23] Interestingly, shortly after the publication of the Lien Report, a majority of this Court in Armco Can. Ltd. v P.C.L. Const.

Ltd., (SK CA), [1986] 4 WWR 624 (Sask CA) [Armco], found no requirement for privity of contract under s. 3(3) of TheMechanics’ Lien Act, because that section, when compared to s. 6(2) of the newly enacted Builders’ Lien Act, made direct reference toadditional beneficiaries (at para 15): ... 3(3) Where a sum becomes payable undera contract to a contractor by an owner ...[it] shall, until paid to the contractor,constitute a trust fund in the owner’s handsfor the benefit of the contractor,subcontractor, The Workers’Compensation Board, workmen, andpersons who have supplied materials ... orwho have rendered work or services on thecontract site... 6(2) Where the owner provides his owncapital ... and where amounts becomepayable under a contract to a contractor, themoneys in the hands of the owner ...constitute a trust fund for the benefit of thecontractor. [24] In Armco, when addressing the policy underlying s. 3(3) of The Mechanics’ Lien Act, Cameron J.A. (Tallis J.A. concurring),

wrote: [ 25 ] The court [in Krupp Industries ] invoked the trust provisions of s. 3 and having, in my respectful view, given the trust provisions of that

section substantially the same construction as I suggest be given to them in this case, allowed Krupp to bypass the chain and recover, directly, from the owner, even though there was no privity between the owner and Krupp, or between the contractor and Krupp, and even though the remainder of the funds in the owner’s hands were owing to the contractor on the main contract.

Obviously, had Neuls, as the contractor, been the sole beneficiary of the s. 3(3) trust fund, of which the [Regina] Court Club as owner was the trustee, Krupp could not have recovered from the fund. [ 26 ] In conclusion I might add that I believe the equities underlying these issues rather favour this construction of the s. 3(3) trust. Either the general contractor will have to absorb losses occasioned by the default of a subcontractor, or the sub-subcontractors will have to do so.

It is the general contractor who chooses the subcontractor and, being well situated to do so, will often require of the subcontractor a performance bond, as indeed it did here. Moreover, the general contractor, standing as he does above the subcontractors in the construction pyramid, is in a position to exercise considerable control over the project, including financial control. Contrast that with the position of those beneath the subs: they are, of course, considerably weaker, and a good deal more vulnerable.

Now having regard for this and for the objects of the Act to which I earlier referred, I have no difficulty concluding that the framers of s. 3(3) intended it to have the effect which I have given it. [25] In a way, the majority decision in Armco identified its own limitations, namely, that the Legislature had substantially modified the owner’s trust under then new Builders’ Lien Act to exclude direct reference to subcontractors, sub-subcontractors, etc., as beneficiaries.

In that regard, although decided on the basis that privity of contract is not required for an owner’s trust, Armco supports the conclusion that privity of contract is now required under the extant Builders’ Lien Act . In fact, that is the

interpretation given to Armco by L.P. Ettinger in Construction Industry Trusts , where the author summarised the circumstances leading to the enactment of The Builders’ Lien Act (at 413): The legislative process in the three provinces which have recently codified the privity of trust theory has also been interesting. The most recent Builders’ Lien Act in Saskatchewan clearly adheres to privity of trust.

The trust imposed on funds in the owner’s hands is for the benefit of the contractor; the trust imposed on funds received by the contractor or owing to the contractor is for the benefit of subcontractors, suppliers and labourers, all of whom have contracted with the contractor for the purpose of the project.

The [ Lien Report ] which was released in 1984 is interesting in that the authors assumed that the then current provisions required privity of trust despite the words of the statute which specified that the contract price was held on trust by the contractor and subcontractor for the benefit of “the owner, builder, contractor, subcontractor, the Workers’ Compensation Board, workmen, materialmen and persons who have supplied services”. Of course the Committee did not have the benefit of the decision of the Saskatchewan Court of Appeal in Armco at that time.

However, the case authority provided by the Committee in support of its claim that privity of trust was the law in Saskatchewan was particularly weak. Unfortunately the issue appears to have been decided in favour of privity of trust with little consideration of any alternative. (Footnotes omitted) E. Hansard [26] Following release of the Lien Report , the Standing Committee of the Legislature on Non-controversial Bills addressed the issue of privity of trust between beneficiaries and trustees under Bill No. 112 of 1984-85-86, which became The Builders’ Lien Act .

In committee, the following relevant exchange occurred between Committee chairman, E.B. Shillington, MLA, and Georgina Jackson (as she then was), who appeared for the Department of Justice: Mr. Chairman – Just outline again for my benefit in general terms what the substantial changes were to this section,

Part II, with respect to the trust provisions. Mrs. Jackson – Probably the single most major change is the drafting.

Section 3 of the previous Bill has not been split into three sections 6 , 7 , and 8 because there was always some concern when a person simply read the

section as to whether or not there has to be privity of contract…privity of trust that would follow the privity of contract lines. And it took us eight years to get some superior level court decision to say that was the effect of

section 3, and the bar continued to have problems with

section 3. Everything was in

section 3, but it was how it was drafted. So 6, 7, and 8 now clearly mark the lines of privity of contract means privity of trust. (Ellipses in original) F. Academic works [ 27 ] Not unsurprisingly, the academic works that touch on the issue in this appeal are consistent with the Lien Report and Hansard . As noted above, Construction Industry Trusts describes The Builders’ Lien Act as codifying the privity of trust theory and as clearly adhering to that theory. In addition, in their Lien Manual , Messrs.

Gough and Hirschfeld set out the purpose of the trust remedy under The Builders’ Lien Act in these terms (at 3–4): The purpose of the trust provisions is to ensure that the funds to be used for the project, and which are put into the pyramid at the top, remain in the pyramid and flow down from layer to layer to the bottom. In other words, the purpose of the trust provisions is to guarantee that the parties entitled to the funds will receive them without interference from third-party claims such as judgment creditors.

The trust provisions are also in place to guarantee that a person who has received funds for the benefit of claimants below him or her will pay those funds to those claimants and not divert them to a personal use, or a use inconsistent with the trust.

[ 28 ] On the specific issue of whether privity of contract is required under the trust provisions, the authors of the Lien Manual state (at 23): Another distinction between trust remedies and lien remedies is that, while the lien remedies were created to alleviate the harshness of the privity of contract rule, privity of contract applies to trust claims. A beneficiary, therefore, may only claim against his or her statutorily designated trustee. And, the authors address the privity of contract issue in more particular terms under the s. 7 contractor’s trust (at 26) : The second trust provided for in the Act is contained in

section 7 and this is the contractor’s trust. Under this trust, the trustee is the contractor and the beneficiaries are the subcontractors. There is a direct contractual link between the trustee and the beneficiary, and thus the requirement for privity. G. Jurisprudence [ 29 ] While the Lien Report , Hansard and relevant academic works are all strong indicators that the Legislature intended to require privity of contract and of trust between trustees and beneficiaries under ss. 6 , 7 and 8 of The Builders’ Lien Act , the case law is not so clear. It is, however, common ground that Graham is the germinal case addressing the issue of privity of contract or trust under

Part II of The Builders’ Lien Act . 1. Graham Construction and Engineering

(1985) Ltd. v Weyburn (City) [ 30 ] In Graham , MacLeod J. dealt with a claim of set-off between a general contractor and two lien holders who had been suppliers to a subcontractor. The subcontractor had abandoned the project and had failed to pay the suppliers. The general contractor sought to set-off its claim for damages caused by the subcontractor’s defalcation against monies held in the contractor’s trust (s. 7) in excess of the statutory holdback.

In granting the relief sought by the contractor, MacLeod J. provided this explanation of the trust provisions under The Builders’ Lien Act : [16] The Builders’ Lien Act creates three distinct trusts: the owner’s trust, the contractor’s trust, the subcontractor’s trust. [17] Each trust has the three basic elements of a trust: a trustee, subject matter and beneficiaries. [18] The purpose of the trusts is to ensure that moneys earmarked for the project remain within the construction pyramid and are not diverted to other purposes.

The beneficiaries are to be assured of the contract money in priority to all third parties, and may bring an action for breach of trust against the trustee where monies are used for purposes not contemplated by the trust. [19] The essential connecting link between each trustee and the beneficiaries of the trust is privity of contract. [20] There is no privity of contract between Markland and Foxboro on the one hand and Graham on the other, and therefore no beneficiary-trustee relationship exists.

Markland and Foxboro are not beneficiaries of the contractor’s trust, they are beneficiaries of the subcontractor’s trust. [21] Subject to the holdback obligations, the contractor Graham is granted by s. 13 the right to set off any outstanding debts, claims or damages owed to it by the beneficiary H.B. Electric Ltd. that are related to the improvement. (Emphasis added) [ 31 ] In this appeal, Prestige has argued that MacLeod J.’s comments were obiter since s. 13 of The Builders’ Lien Act grants an express right of set-off and the applicant in Graham was not seeking to enforce the trust.

However, I do not interpret MacLeod J.’s comments as obiter dicta . His comments were necessary to the result in Graham because they explain why the lien claimants (i.e., the suppliers) were entitled to a claim against the statutory holdback but not against the remaining funds in trust and how that fit within the scheme of The Builders’ Lien Act .

Justice MacLeod elaborated on this point: [29] The Act is designed to protect persons down in the construction pyramid and ensure that they receive payment for materials and services supplied to the project regardless of whether persons above them in the contractual pyramid default. [30] The lien claimants Markland and Foxboro are not entitled to claim against the trust monies in the hands of the contractor. They are, however, entitled to claim against the statutory holdback required to be maintained by the contractor. The formula of the holdback is set forth in s. 34(1) and (3) above.

The amount required to be held back is the greater of 10% of payments made or 10% of the value of the work actually provided, calculated on the contract price. [ 32 ] Although not as clear as Graham , the decision in Parkinson Enterprises Ltd. v Artistic Homes Ltd. , 2004 SKQB 83 , 36 CLR (3d) 40 [ Parkinson ], implicitly dealt with an alleged breach of the s. 7 contractor’s trust on the principle that privity of contract had to exist between the subcontractors and the contractor. 2. 101058955 Saskatchewan Ltd. v Can-American Service Ltd. [ 33 ] On the other hand, the Court of Queen’s Bench has also interpreted The Builders’ Lien Act as not requiring privity of contract between trustee and beneficiary.

In 101058955 Saskatchewan Ltd. v Can-American Service Ltd. , 2012 SKQB 201 , 19 CLR (4th) 21 [ Can-American ], a case involving a dispute between a contractor [101058955] and owner [Can-American] about the quality of work performed, the defendant owner claimed its sole shareholder, director and officer (Stephenson) had contracted directly with 101058955 and, therefore, that there was no privity of contract between Can-American and 101058955. That is, Can-American claimed Stephenson had acted as its general contractor by contracting directly with 101058955. Justice Scherman rejected this argument and found

Stephenson had been acting as an agent for an undisclosed principal when entering the contract with 101058955. However, Scherman J.then added: [10] I also note that pursuant to the provisions of ss. 6 and 7 of The Builders’ Lien Act, S.S. 1984-85-86, c. B-7.1, and the owner’strust and contractor’s trust created thereby, the owner’s own capital or any monies in the hands of the owner constitutes a trust fund forthe benefit of his general contractor and, in turn, all amounts owing by the owner to the contractor constitute trust funds for the benefit ofany subcontractors or suppliers.

A builders’ lien having been registered by the plaintiff against the defendant’s lands, the owner similarlybecomes, by virtue of these provisions, responsible for the payment of its general contractors’ obligations to subcontractors andsuppliers. (Emphasis added) While the forgoing supports the proposition that privity of contract or trust is not required under The Builders’ Lien Act, I find SchermanJ.’s comment to be obiter dicta because he had already determined Stephenson was acting as agent for Can-American, meaning he hadalready found there was privity of contract between the owner and the ostensible subcontractor. 3.

Re Kerr Interior Systems Ltd. [34] Although not a Saskatchewan case, the court in Kerr Interior Systems Ltd. v Kenroc Building Materials Co. Ltd., 2009 ABCA240, [2009] 8 WWR 1 [Kerr], dealt with the trust provisions under our Builders’ Lien Act. In that case, O’Brien J.A. wrote: [11] I interpret section 6(2) of the S.B.L.A. to impose a trust for the benefit of Kerr, with respect to the amount of $302,022.09 owedby 101 to Kerr.

Thus, Kerr had an equitable interest in this trust fund. [12] I further interpret section 7(1) of the S.B.L.A. to mean that the amount of $302,022.09 owed to Kerr was impressed with a trustfor the benefit of Kenroc, among others, as a subcontractor. [13] Accordingly, there was what may be called a double trust.

Kerr had a trust interest in the monies owed by 101, and Kenroc had atrust interest in the monies owed to it by Kerr, which interest was secured by the first trust. (Emphasis added) Importantly, O’Brien J.A. had been called upon to determine whether lien claimants were secured creditors within the meaning of theCompanies’ Creditors Arrangement Act, RSC 1985, c C-36. As I read his reasons, O’Brien J.A. acknowledged the fact that The Builders’Lien Act establishes multiple trusts in the course of determining what assets constituted trust assets under that Act.

I do not read hiscomment about a “double trust” as addressing the issue of privity of contract in any meaningful way. 4. TransGas Ltd. v Mid-Plains Contractors Ltd. [35] Turning to the jurisprudence from this Court, in TransGas Ltd. v Mid-Plains Contractors Ltd. (1993), (SKCA), 105 Sask R 211 (CA) [TransGas], affirmed (SCC), [1994] 3 SCR 753, Tallis J.A. reviewed competing claims totrust funds held by a contractor. One of the issues was whether lien claimants were secured creditors within the meaning of the IncomeTax Act, SC 1970-71-72, c 63.

When addressing that issue, Tallis J.A. wrote: [44] When Mid-Plains abandoned the TransGas contracts, all the moneys constituting the B.L.A. trusts were in the hands of TransGas(owner). Subsection 6(2) clearly states that “where amounts become payable under a contract to a contractor” the moneys in the owner’shands for payment under the contract constitute a trust fund for the contractor’s benefit. As well, these moneys owing or payable to thecontractor, constitute trust funds for the benefit of the subcontractors.

Under s. 19(1) of the Act, a trustee’s obligations continue for atleast one year after the abandonment of a contract. [45] In the light of these statutory provisions, we decline to hold that TransGas is trustee for only the subcontractors and not thecontractor who has abandoned the project.

After allowing for a set-off, there were substantial moneys owing to the contractor at thetime of abandonment and subsequent termination of the uncompleted contracts. [46] In this case, and under the provisions of the “contractor’s trust”, the debtor is Mid-Plains and the secured party, by virtue of thetrust, is the class of persons who have contracted with the contractor “for the purpose of performing the contract”.

The contractor, astrustee, is subject to the condition that until “all persons for whose benefit the trust is constituted are paid all amounts relating to theimprovement owed to them by the contractor”, no part of the trust fund can be used for “his own use or any use inconsistent with thetrust”. Consequently, if the contractor (debtor) does not perform its obligation to pay the amounts owing, the trust fund provides asource of payment or compensation.

Given the language of ss. 6 and 7 of the B.L.A., we conclude that TransGas is trustee for Mid-Plainsand that the trust fund is a “security interest” under s. 224(1.3) of the I.T.A. [47] In reaching this conclusion that the “contractor’s trust” falls within the definition of a security interest under s. 224(1.3), we referto the following passage in D. W. Waters: Law of Trust in Canada (2nd Ed.), at pp. 451 to 452: “Mechanics’ Lien Act trusts constitute a statutory provision of security.

The contract price paid by the owner to the building or contractoris held on trust by the recipient, and the legislation gives a first priority over that trust fund to the unpaid subcontracting supplier ofgoods or services. The owner of the land may himself be a trustee of the purchase moneys in his own hands. Such a trust arises when theowner is informed in a required manner that the work is satisfactorily completed, so that the obligation to make payment becomes due.The trust is in favour of all those who have supplied goods or services as subcontractors, as well as the head contractor himself.

Theobjective of this legislation is to implement the policy decision that subcontractors can be ensured of payment, and have priority in thebankruptcy of the head contractor.”

(Emphasis added) [36] As can be seen, Tallis J.A. undoubtedly approached the issue under the Income Tax Act as though an owner stands as trusteeto the contractor under the owner’s trust (The Builders’ Lien Act, s. 6) and as trustee to subcontractors under the contractor’s trust (TheBuilders’ Lien Act, s. 7). However, in answering the question before him, Tallis J.A. appears not to have been referred to the Lien Report,Hansard, Armco or Graham.

Notably, the TransGas appeal had not directly asked the question arising in this case, namely, whether asubcontractor could sue an owner for breach of the owner’s trust in the absence of privity of contract. The Supreme Court of Canada didnot address the trust provisions in its decision affirming TransGas. 5.

Ansco Construction Ltd v Audux Investments Inc. [37] A year after the decision in TransGas, this Court plainly acknowledged a privity of contract or trust requirement in AnscoConstruction Ltd v Audax Investments Inc. (1994), (SK CA), 120 Sask R 64 (CA) [Ansco], where Lane J.A., dealingwith an action for breach of trust and enforcement of a lien, wrote: [13] In order for Ansco to succeed against Audax, in its trust claim, the trial judge recognized Ansco would have to be in directcontractual relationship with Audax. The trust obligation of the owner is set out in s. 6(1) and (4) of the Act: ...

Thus Audax, as the owner, owed trust obligations to its contractor. The question then is who was the contractor on this project? Audaxargued Savannah was the contractor and, as such, only Savannah could bring an action against it for breach of trust. … … Ansco admitted it was not engaged by Audax directly, but argued, alternatively: (

i) the corporate veils of Savannah and 577239 shouldbe pierced to discover Williams as the controlling mind of each corporation, i.e., when Savannah contracted with Ansco it was really577239, the managing partner of the syndicate, contracting with Ansco and therefore the owner who engaged Ansco; and (ii) if thecorporate veil cannot be pierced, Savannah acted throughout as the agent of the owner so as to make Ansco the contractor in accordancewith the definition of contractor in the Act. [38] Justice Lane then considered each of the appellant’s arguments and concluded there was no basis to interfere with the trialjudge’s findings of fact.

However, in addressing the question of whether the trial judge had erred when he found the contractor had notacted as agent for the owner, i.e., that there was no privity of contract, Lane J.A. wrote: [20] It was argued that to support the trial judge’s conclusions would seriously undermine The Builders’ Lien Act. The Act relies, inthe enforcement of the trust, on the traditional structure of a construction project, i.e., the owner engages the contractor which, in turn,engages the subcontractor. Thus privity of contract with respect to the trust provisions is respected.

The subcontractor can sue thecontractor for breach of trust and the contractor can in turn sue the owner. The Act does not look at who is performing the functions ofthe contractor or the subcontractor, but rather who has contracted with whom. In this case, the principal of Audax admitted he lost faithin Williams and, instead of paying Williams or Savannah directly, which Audax was required to do, Audax paid large sums to 577239and, it was alleged, not all project funds found their way through the construction pyramid as a result of this breach.

Ansco argued that ifSavannah was found to be the contractor and not the agent of the owner, it will mean, in future cases, an owner can simply engage a shillwho, under the Act, would be considered a contractor and thereby avoid the trust obligations of the Act. It is on this basis Ansco argued itwas possible for this court, given the standard of appellate review, to intervene. In essence, Ansco’s counsel argued the trial judge erredin principle by finding Savannah to be the contractor when Savannah performed none of the functions of the contractor.

While the appellant in Ansco had not disputed the principle that privity of contract or trust must exist between trustee and beneficiaryunder The Builders’ Lien Act, the principle itself underpins the whole of the decision. 6.

Summary of Jurisprudence [39] All told, the later decisions in Kerr and Can-American are consistent with TransGas, albeit they are not necessarilyinconsistent with the existence of a requirement of privity of contract or trust between beneficiary and trustee; whereas, Graham,Parkinson and Ansco each express or clearly adopt that principle. Notably, Kerr is not binding in this jurisdiction and Can-Americandoes not refer to TransGas, Ansco or Graham.

Moreover, TransGas itself makes no reference to Armco or Graham or to the Lien Reportor Hansard, leading me to conclude it is per incuriam on the question raised in this appeal. In the result, I find there is some uncertaintyin the jurisprudence, but the preponderance of the case law supports an

interpretation of the trust provisions of The Builders’ Lien Act asrequiring privity of contract between trustee and beneficiary. IV. conclusion [40] Although there is some uncertainty in the jurisprudence, the language of The Builders’ Lien Act, the Lien Report, Hansard,and the academic works in this area all strongly support an

interpretation of ss. 6, 7 and 8 of The Builders’ Lien Act that includes therequirement of privity of contract. Based on the indicators discussed above, I have no hesitation concluding the Legislature intended tocodify the principle of privity of contract and privity of trust under ss. 6, 7 and 8 of The Builders’ Lien Act. In practical terms, this meansss. 6, 7 and 8 of The Builders’ Lien Act operate such that a plaintiff must have a direct contractual relationship with a trustee to claim as abeneficiary under the trust held by the trustee. [41] I therefore conclude the Chambers judge did not err in her

interpretation of the trust provisions of The Builders’ Lien Act.Accordingly, I find no reason to address the fresh evidence application or other grounds of appeal.

[ 42 ] I would dismiss the appeal. I would award Prairie Green its costs, including in respect of the fresh evidence application, in the fixed amount of $8,000. “Caldwell J.A.” Caldwell J.A. I concur. “Ottenbreit J.A.” Ottenbreit J.A. I concur. “Whitmore J.A.” Whitmore J.A.