Kelly Panteluk Construction Ltd. Appellant (Applicant) v. Canadian Pacific Railway Company, 2022 SKCA 59

Court of Appeal for Saskatchewan Docket: CACV3889 Citation: Kelly Panteluk Construction Ltd. v Canadian Pacific Railway Company , 2022 SKCA 59 Date: 2022-05-17 Between: Kelly Panteluk Construction Ltd. Appellant (Applicant) And Canadian Pacific Railway Company Respondent (Respondent) Before: Ottenbreit, Schwann and Kalmakoff JJ.A. Disposition: Appeal allowed Written reasons by: The Honourable Mr. Justice Ottenbreit In concurrence: The Honourable Madam Justice Schwann The Honourable Mr.

Justice Kalmakoff On appeal from: 2021 SKQB 223 , Regina Appeal heard: January 31, 2022 Counsel: James Ehmann, Q.C. and Krista Johanson for the Appellant Munaf Mohamed, Q.C. and Christine Viney for the Respondent Ottenbreit J.A. I.

INTRODUCTION [ 1 ] Kelly Panteluk Construction Ltd. [KPCL] appeals the decision of a Court of Queen’s Bench Chambers judge dated August 19, 2021, determining that Canadian Pacific Railway Company [CP] is entitled to retain a construction holdback owed to KPCL as a set-off against CP’s claim for breach of contract, negligence and damages in an action against KPCL and other defendants: Kelly Panteluk Construction Ltd. v Canadian Pacific Railway Company , 2021 SKQB 223 [ Decision ]. [ 2 ] For the reasons hereinafter set forth, the appeal is allowed. II.

FACTS AND BACKGROUND [ 3 ] KPCL and CP entered into a supply of services contract effective March 12, 2015 [Contract]. It was one of a number of contracts that CP had signed dealing with the design and construction of a new 30.4 kilometre CP railway spur, known as the Belle Plaine Railway Spur [Project], between an existing CP spur line near Belle Plaine, Saskatchewan, and a proposed potash mine near Findlater, Saskatchewan. [ 4 ] The Contract had a number of schedules attached to it. Two are germane.

Schedule A was entitled and consisted of General Terms and General Conditions [Schedule A].

Schedule B was entitled and consisted of a Description of Serv i ces complete with a

Schedule of Quantities, Prices and Construction

Schedule [Schedule B]. Pursuant to the Contract, KPCL agreed to perform substantially all of the excavation, grading, earthwork and embankment work to complete the Project. The Contract had an initial value of $87,371,682. [ 5 ] On December 5, 2015, the Project suffered the collapse of a significant segment of an earthwork embankment. CP was required to redesign the affected segment of the Project and reconstruct the entirety of the damaged earthworks.

Consequently, CP issued a number of purchase orders and change orders for the required remediation work, as well as for the reconstruction of the embankment following a new design. KPCL provided work and services for that remediation. [ 6 ] On December 20, 2016, CP issued a Certificate of Substantial Performance of the Contract for the Project, with a certified final value of $121,447,776.59. A Certificate of Completion of Work was issued by CP on December 20, 2017, certifying completion of the Project as of December 15, 2017 [Certificate]. [ 7 ] CP paid KPCL for all of the remediation work it had performed.

The full Contract price due and owing to KPCL was paid by CP, except for the ten per cent holdback [Holdback] established by clause 5 of

Schedule B. [ 8 ] The issuance of the Certificate triggered clause 45.9 of the Contract, which provides that the Holdback became due and payable 45 days thereafter. It reads: 45.9 Immediately following the issuance of the certificate of Completion of the Work, the Engineer will issue a certificate for payment of holdback monies.

The holdback monies authorized by this certificate shall become due and payable after forty-five (45) days of the date of the certificate of Completion of the Work, providing that CP may retain out of such holdback monies any sums in accordance with the terms of this Agreement, or required by law or otherwise to satisfy any claims against CP or the Work or other monetary claims against the Contractor and enforceable against CP and that the Contractor has submitted to CP a Statutory Declaration and/or other evidence satisfactory to CP, that all accounts for labour, Workers’ Compensation, subcontracts, Materials, Equipment and other indebtedness which

may have been incurred by the Contractor in the Completion of the Work and for which CP might in any way be held responsible have been paid in full except holdback monies properly retained. [ 9 ] The Holdback therefore became due and owing by no later than February 5, 2018. On February 6, 2018, CP admitted that the Holdback value was $12,708,731.96, but refused to pay it to KPCL. CP purported to retain the Holdback as a set-off for damages to be proven relating to the collapse of the earthwork embankment.

It claimed these damages in an action for breach of contract and negligence that it commenced against KPCL and several engineering and consulting companies that had provided work and services to the Project [CP claim]. [ 10 ] KPCL applied under ss. 17 and 38 of The Builders’ Lien Act , SS 1984-85-86, c B-7.1 [ BLA ] and Rule 3-49 of The Queen’s Bench Rules for an order for immediate payment of the Holdback. CP applied to stay the application but was unsuccessful.

CP’s appeal from the dismissal of the stay application was allowed in part by this Court in Canadian Pacific Railway Company v Kelly Panteluk Construction Ltd. , 2020 SKCA 123 [ KPCL 2020 ]. In that case, this Court stated that the Holdback was contractual, not statutory, and that it constituted trust monies under the BLA . [ 11 ] Pursuant to the order of this Court, the matter was remitted to the Court of Queen’s Bench for a determination of two questions: (

a) whether CP was entitled to retain the Holdback pursuant to the Contract by virtue of a claim of set-off in contract or otherwise; and (

b) whether CP was entitled to retain the Holdback by virtue of s. 13 of the BLA . III. DECISION OF THE JUDGE [ 12 ] The two questions set by this Court, as noted above, were heard by the judge in Chambers. [ 13 ] The judge began by stating: [11] In sum, these two questions require a determination as to CP’s right to claim set-off by contract, by statute, by law, or equitably. However, KPCL concedes the second question and agrees, for the purposes of this Application, that s. 13 of the BLA permits an owner to set-off damages for alleged non-compliance with the terms of the Contract.

Thus, the remaining issues relate only to the first question, which is whether CP is entitled, by contract or otherwise, to retain the Holdback as a set-off against damages sought in the CP Claim. [ 14 ] The judge then summarized the parties’ arguments on contractual set-off, legal set-off and equitable set-off, observing that, in respect of contractual set-off, the parties had agreed that clause 45.9 of the Contract provided authority for CP to retain monies owing to KPCL in certain circumstances and that no other provision of the Contract allowed it to set-off against the Holdback. [ 15 ] The judge reviewed the parties’ arguments with respect to the proper

interpretation of clause 45.9, noting that it was disputed whether CP could rely on the words “to satisfy any claims against … the Work” in that clause to retain the Holdback. [ 16 ] The judge moved on to consider the parties’ arguments on legal set-off and equitable set-off, and concluded that CP had not established a right to either: [44] Otherwise, I agree with KPCL that CP does not have a right to legal set-off, in the absence of mutual debts.

I also agree that it is not manifestly unfair to deny CP an equitable set-off against trust funds, in view of the delayed complaint by CP and because the CP Claim does not “directly … impeach” KPCL’s demand for payment of the Holdback. [ 17 ] The judge then returned to deal with clause 45.9. She described it as follows: [40] It is apparent that clause 45.9 is not clear in specifying when CP may retain monies out of the Holdback. The clause principally deals with the contractor’s right to payment of the Holdback.

Seemingly as an aside, the clause permits CP to retain monies from the Holdback in certain circumstances. The breadth of these circumstances is in issue here. [ 18 ] The judge did not, however, determine whether clause 45.9 gave rise to a contractual right of set-off in favour of CP. [ 19 ] The judge next turned to address s. 13 of the BLA . She found that this

section permitted an owner, who is in the position of a trustee in relation to a holdback that is trust property, to retain it in an amount equal to “outstanding debts, claims or damages”. The judge again stated that KPCL had conceded that the CP claim was an outstanding claim within the meaning of s. 13 . [ 20 ] The judge concluded that, in view of s. 13, the right to set-off must be clearly and expressly removed by contract but the parties had not done so in this case. She found that CP was therefore entitled to retain the Holdback as a set-off for its claim. [ 21 ] It is from that determination that KPCL appeals. IV. ISSUES [ 22 ] This appeal raises the following issues: (

a) Should KPCL’s reply factum be considered? (

b) Did the judge err in stating that KPCL had conceded the question of whether CP was entitled to retain the Holdback by virtue of s. 13 of the BLA ? (

c) Did the judge err in failing to provide adequate reasons for her conclusion that s. 13 of the BLA permitted CP to retain the Holdback?

(

d) Does s. 13 of the BLA create an independent statutory right allowing CP to retain the Holdback? (

e) Did the judge err in failing to interpret clause 45.9 of the Contract? [ 23 ] Given that the judge concluded that legal and equitable set-off did not exist in the circumstances of this case, it is not necessary to consider whether KPCL and CP contracted out of those kinds of set-off by virtue of the Contract. V. ANALYSIS A. Should KPCL’s reply factum be considered? [ 24 ] KPCL filed a reply factum on the basis that CP has raised new arguments for the Decision to be upheld, notwithstanding the errors in the reasons for decision.

After a careful review of the reply factum, I conclude that it was properly filed and can be considered. [ 25 ] Although there are parts thereof not in compliance with Rule 33.1 of The Court of Appeal Rules , I find the reply factum to be substantially in accord with that rule in that it addresses the following new issues that were raised by CP: (

a) KPCL’s oral concessions before the judge; (

b) that KPCL has resiled from the concessions it made in the court below; and (

c) that CP has, contrary to the position it took before the judge, made a new argument on appeal to the effect that any statutory trust under s. 13 ousts common law principles. B. Did the judge err in stating that KPCL had conceded the question of whether CP was entitled to retain the Holdback by virtue of s. 13 of the BLA ? C. Did the judge err in failing to provide adequate reasons for her conclusion that s. 13 of the BLA permitted CP to retain the Holdback ? [ 26 ] These two issues may conveniently be dealt with together. [ 27 ] The judge’s references to s. 13 of the BLA are limited.

As noted above, she started her decision by setting out the issues noted above and commented that KPCL had conceded the second issue with respect to s. 13 . [ 28 ] She concluded her decision by referring to s. 13 , as follows: [42]

Section 13 of the BLA permits an owner, who is in the position of a trustee in relation to the holdback, to retain the holdback, which is trust property, in an amount equal to “outstanding debts, claims or damages”. … [43] In view of s. 13 , I am persuaded by the decision in Swagger that the right to set-off must be clearly and expressly removed by the Contract. It is not. Consequently, while the Contract does not contain an additional rights clause, in my view, clear language is required to remove the right of set-off provided in s. 13 of the BLA .

I find therefore that CP is entitled to retain the Holdback as a set-off against its claims for breach of contract and damages in the CP Claim. [ 29 ] As will be seen, the judge conducted no analysis of the meaning of s. 13 and whether it created a free-standing right for CP to set-off its claim against the trust fund established by s. 6 and, therefore, retain the Holdback. It appears that she believed that was unnecessary because of KPCL’s concessions described above, as she understood them. [ 30 ] In this Court, the parties dispute the nature and extent of KPCL’s concession.

CP argues that KPCL conceded that it could retain the Holdback pursuant to s. 13 . KPCL submits that it did not make that concession but merely acknowledged that CP’s claim was the type of claim that was capable of resulting in a retention of funds under that section. The parties specifically disagree about the ambit of any such concessions made by KPCL in oral argument.

In the absence of evidence regarding what was said before the judge, I will proceed on the basis of KPCL’s written submissions with respect to any concessions. [ 31 ] KPCL, at paragraphs 24 to 30 of its brief proper filed with the judge, made a clear argument that s. 13 cannot be seen as creating a right of set-off where none otherwise exists. It submitted that when s. 13 and s. 6 are read together with the common law prohibition against a trustee setting off against trust funds, it all points to the conclusion that s. 13, properly interpreted, merely relieves the owner as trustee from that prohibition.

It argued that s. 13 achieves no more than permitting a set-off or retention of trust funds where it would be allowed contractually or otherwise. Paragraphs 43 to 45 of KPCL’s brief proper, in substance, make substantially the same argument with respect to s. 13 . [ 32 ] In its reply brief, KPCL stated: 21. CP argues that the term “Claim” as it appears in

section 13 of The Builders’ Lien Act can include unliquidated and unproven pending claims related to the improvement in question, such as the CP Claim. For the purposes of this application, KPCL is prepared to concede that-point. 2 At common law, an owner has a right of set-off for damages for alleged noncompliant performance, entitling the owner to retain all or a reasonable portion of the contract price otherwise due. [ 33 ] The footnote referenced in paragraph 21 read as follows: 2 Thus the argument laid out at paragraphs 43 to 45 of our Brief proper may be set aside for another day. There is a simpler ground for rejecting CP’s

section 13 argument, namely, the Contract governs. [ 34 ] The reply brief, at paragraphs 22 to 24, then went on to argue in substance that s. 13 does not give a free-standing right to a set-

off, echoing KPCL’s submissions in its brief proper. [ 35 ] What I take from the submissions in KPCL’s briefs, read as a whole, is that it conceded that the CP claim is the type of claim that may be made under s. 13 provided there is a basis for it in the common law, equity or in the Contract. This

interpretation is consistent with the majority of KPCL’s submissions, both before the judge and this Court, that there is no basis whatsoever, either under clause 45.9 of the Contract, legal set-off, equitable set-off and, therefore, s. 13 , for allowing CP to retain the Holdback. [ 36 ] Given the foregoing, I conclude the judge erred in determining that KPCL had conceded that s. 13 afforded CP the right to retain the Holdback in the circumstances of this case. [ 37 ] The judge also did not decide whether clause 45.9 allowed or prohibited CP from retaining the Holdback.

Nor did she decide whether, generally speaking, the right to set-off must be expressly removed by contract or specifically provided by contract. However, she did reference s. 13 as establishing a right to retain the Holdback and coupled that observation with the supposed concession by KPCL. The crucial statement is as follows: [43] In view of s. 13 , I am persuaded by the decision in [ Swagger v U.B.C. , 2000 BCSC 1839 , 7 CLR 99] that the right to set-off must be clearly and expressly removed by the Contract. It is not.

Consequently, while the Contract does not contain an additional rights clause, in my view, clear language is required to remove the right of set-off provided in s. 13 of the BLA . … [ 38 ] I take from the foregoing that the judge had assumed that s. 13 creates a free-standing right to set-off that was not removed by the Contract. This is a somewhat unusual conclusion given that contracting out of s. 13 would be complicated by s. 99(2) of the BLA . This

section states that “[e]very contract or subcontract related to an improvement shall be deemed to be amended insofar as is necessary to be in conformity with this Act”. Without deciding the issue, I note that it may not be possible to contract out of the effects of s. 13 if it provides a free-standing right to retain trust monies. [ 39 ] All the foregoing is to say that the judge did not do the analysis necessary to determine whether s. 13 creates a free-standing right to retain the Holdback. Notably, CP, at several places in its factum, acknowledges that the judge did not engage in an explicit exercise of statutory

interpretation. [ 40 ] On that basis, there are understandably no reasons on that issue. Given this lacunae, it falls to this Court to interpret s. 13 . D. Does s. 13 of the BLA create an independent right of set-off allowing CP to retain the Holdback? [ 41 ] It is common ground that the Holdback is trust money pursuant to s. 6 of the BLA , which reads as follows: 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 the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and 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. [ 42 ] It is also common ground that, by virtue of this Court’s decision in KPCL 2020 , the Holdback is contractual rather than statutory. [ 43 ]

Section 13 reads as follows: Set off by trustee 13 Subject to the requirement to maintain a holdback, a trustee may, retain from trust funds an amount that, as between himself and the person he is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee’s favour of all outstanding debts, claims or damages, that are related to the improvement. [ 44 ] KPCL argues that s. 13, properly interpreted, does not create an independent right of set-off.

KPCL reiterates its argument in the court below that s. 13 merely confirms there is no prohibition against a trustee setting off against a beneficiary for contractual, legal or equitable claims against monies in excess of holdback funds, notwithstanding the existence of the statutory trust established by s. 6. It argues that, despite the fact there is no statutory holdback in this case, s. 43 is applicable and grounds the payment obligation in a contract

between parties and confirms the Legislature’s intention not to interfere with a contractual relationship except as required to give effect tothe BLA. [45] CP takes a different view. It submits that s. 13 creates a free-standing right to retain the monies in the circumstances listed inthe section. [46] I start with the principles governing statutory

interpretation. These are set out in s. 2-10 of The Legislation Act, SS 2019, c L-10.2: Acts and regulations remedial 2-10(1) The words of

an Act and regulations authorized pursuant to

an Act are to be read in their entire context, and in their grammaticaland ordinary sense, harmoniously with the scheme of the Act, the object of the Act and the intention of the Legislature.

(2) Every Act and regulation is to be construed as being remedial and is to be given the fair, large and liberal

interpretation that bestensures the attainment of its objects. [47] This provision is a codification of the principles referenced in Rizzo & Rizzo Shoes Ltd. (Re), (SCC),[1998] 1 SCR 27 at para 21. [48] Builders’ lien legislation is intended to be “benefit-conferring and, accordingly, must be given a broad and purposiveinterpretation” (Livingston (Hi-Cam Builders) v Span West Farms Ltd., 2016 SKCA 33 at para 36, 476 Sask R 158). As such, in order todetermine the proper

interpretation of s. 13 of the BLA, it is necessary to consider the history, purpose and content of the legislation andthe specific provision. 1. Plain meaning [49] For ease of reference, s. 13 is reproduced below: Set off by trustee 13 Subject to the requirement to maintain a holdback, a trustee may, retain from trust funds an amount that, as between himself and theperson he is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee’s favour of alloutstanding debts, claims or damages, that are related to the improvement. [50] My first observation is that the

section is permissive, in that it uses the term “may”. [51] The plain meaning of the words suggests that a trustee may set-off against trust funds in particular circumstances where thetrustee is liable to pay trust monies under a contract or subcontract related to the improvement, and there is a balance in the trustee’sfavour of outstanding debts, claims or damages related to the improvement. The plain meaning does not suggest that any other conditionsneed to exist in order for a trustee to be able to retain trust monies as set-off. [52] In Saskatchewan Builders’ Lien Manual, W. Brent Gough and Collin K.

Hirschfield outline that the “right of set-off is limited,however, to debts or claims relating only to the specific improvement that give rise to the initial trust obligation. … a trustee is not allowedto set off a claim against a beneficiary arising out of a different improvement or a separate matter altogether” (2d ed (Regina: Law Societyof Saskatchewan Library, 2014) at 29).

Further, the authors note that “no trustee may exercise any rights of set-off or reimbursement ofpersonal funds out of holdback funds” (at 29), which is found in the language of s. 13 stating that the right to set-off is “[s]ubject to therequirement to maintain a holdback”. [53] The text does not signal whether the Legislature intended for the right to retain the holdback to arise only where there is anexisting contractual, legal or equitable right to do so, otherwise the appropriate wording to that effect would have been incorporated intothe provision.

Conversely, the text, taken alone, does not clearly shed light on whether the provision creates an independent statutory rightto retain a holdback. 2. Context, scheme and object of the BLA [54] The purpose of the BLA is well established in the jurisprudence. That purpose was summarized by this Court in PrestigeCommercial Interiors

(1992) Ltd. v Suderman, 2018 SKCA 95, 431 DLR (4th) 216: [12] The courts have been called upon to interpret The Builders’ Lien Act on many previous occasions. As such, the overall purpose ofthe legislation is well-identified and well-understood. In Axcess Capital Partners Inc. v Allsteel Builders(2) Limited, 2015 SKCA 33, 383DLR (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 other commercialendeavour, the work, services and materials supplied to an improvement are provided on credit.

The second factor is that the ordinary lawof 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 a complexpiece of legislation designed to assist and facilitate construction. (See Gary G.W. Semenchuck, Q.C. et. al, Liens in the ConstructionIndustry: A Report Prepared for The Hon. J. Gary Lane, Q.C., Minister of Justice by The Special Advisory Committee to the Minister ofJustice 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 to

the improvement of real estate are paid for doing so” (see Hansen v Canadian National Railway Co. (1983), (SK CA),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 commercial interests ofothers, including the owner and the financier, if any, of the improvement”. He stressed that the “statute is primarily concerned with thecommercial interests of persons who, under contract and on credit, contribute service or material to the improvement of real property,whether under contract to the owner, to the contractor engaged by the owner, or to any subcontractor” (para. 26).

As to how the twopurposes interact with each other, he noted importantly that “both purposes may be seen to run through the scheme of the statute” (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 paragraphs fromTown-N-Country. In addition, at paras. 31 and 33 of Saskferco, Gerwing J.A. cited with approval a decision from the British ColumbiaCourt 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 of Defazio, the BritishColumbia 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 mortgageeadvancing 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. (Emphasis in original) [55] Of note is the comment of Jackson J.A. in Axcess Capital Partners Inc. v Allsteel Builders(2) Limited, 2015 SKCA 33, 383DLR (4th) 334 [Axcess Capital], in the above excerpt, that the provisions of the BLA seek to supplement the law of contract. This is a clearstatement that the law of contract still operates in a builders’ lien situation but is modified by the provisions of the BLA. [56] The broader purpose of the BLA must be taken into account in considering the meaning of s. 13.

One factor is, as noted above,that the ordinary law of contract does not provide sufficient remedies to ensure that (

i) funds flow from the top of the constructionpyramid, and (ii) work, services and materials flow from the bottom. The BLA also provides for (

i) the protection of those who provideservices and materials on credit, and (ii) the protection of the commercial interests of others, including the owner. [57] However, as observed in Axcess Capital, the principal object of the Act is to better ensure that those who contribute work andmaterial to the improvement of real estate, pursuant to contract or on credit, are paid for doing so. Put another way, the main object of theBLA is to maintain the flow of money down, what is often described in the jurisprudence as, the construction pyramid. [58]

Section 13 must also be read in context with other provisions of the BLA that might help discern its construction and intent. [59] Of course, s. 6 is relevant in that it constitutes the owner’s trust and defines the owner’s obligations. Of particular note iss. 6(4). This provision imposes a general prohibition against the owner appropriating or converting any of the trust funds to his own use orany use inconsistent with the trust until the contractor is paid all amounts owed to him by the owner. [60]

Section 14 is also relevant. It reads: When trustee discharged 14 Subject to the requirement to maintain a holdback, every payment made by a trustee to a person whom he is liable to pay for services ormaterials provided to an improvement discharges, to the extent of the payment made by him, the trust of that trustee and his obligationsand liabilities as trustee to all beneficiaries of the trust. This provision makes clear that the owner is only relieved from the trust obligation to the extent that he has paid the monies to thebeneficiaries of the trust. [61]

Section 15 is also of interest in that it sets out the priority that a beneficiary of a trust has over the claims of third parties. Itreads: Priorities between beneficiaries and third parties 15 In addition to any other priority which a beneficiary of a trust constituted by this Part may have at law, a beneficiary has priority overall general or special assignments, security interests, judgments, seizures, attachments, garnishments and receiving orders, wheneverreceived, granted, issued or made, of or in respect of the contract or subcontract price or any portion of the contract or subcontract price.

Of significance is that any common law rights of the beneficiary of a trust are acknowledged in respect of the priority. [62] Also relevant is s. 99. It reads: No waiver of rights 99(1) Any covenant in any agreement by any person who provides services or materials to an improvement that this Act or any provisionof this Act does not apply is void.

(2) Every contract or subcontract related to an improvement shall be deemed to be amended insofar as is necessary to be in conformity with this Act. [ 63 ] This provision effectively amends any contract governed by the BLA to accord with its provisions. I will say more about this

section later. [ 64 ] From the foregoing, and keeping in mind the purposes of the BLA set forth above, I conclude the following: (

a) The common law rights of the parties are not ousted by the BLA except insofar as they conflict with the BLA ; (

b) The main object of the BLA is to keep the money regarding a project flowing down the construction pyramid; (

c) There is a general prohibition against the owner appropriating trust monies; and (

d) That general prohibition is modified by s. 13, which allows the owner to appropriate the trust monies under certain circumstances, provided the withholding is related to the project. 3. Intention of the Legislature and legislative history [ 65 ] The trust provisions in the BLA and s. 13, as they exist today, came into force at the beginning of 1986. However, similar but less extensive trust provisions had existed at least since The Mechanics Lien Act , RSS 1978, c M-7 [ MLA 1978 ] came into force. The owner’s trust was set out in s. 3(3) of the MLA 1978 :

(3) Where a sum becomes payable under a contract to a contractor by an owner on the certificate of a person authorized under the contract to make such a certificate, an amount equal to the sum so certified that is in the owner’s hands or received by him at any time thereafter shall, until paid to the contractor, constitute a trust fund in the owner’s hands for the benefit of the contractor, subcontractor, The Workmen’s Compensation Board, workmen, and persons who have supplied materials on account of the contract or who have rendered work or services on the contract site, and the owner shall not appropriate or convert any part thereof to his own use or to any use not authorized by the trust until all workmen and all persons who have supplied materials on the contract or who have rendered work or services on the contract site and all contractors and subcontractors are paid for work done or materials supplied on the contract and The Workmen’s Compensation Board is paid any assessment with respect thereto. (Emphasis added) [ 66 ] As noted in the emphasis above, s. 3(3) stated that trust monies payable pursuant to a certificate could not be appropriated by the owner until all subcontractors and workers had been paid. [ 67 ] In keeping with the principle that the contract monies should be preserved for use and kept within the construction pyramid, the MLA 1978 also provided that the trust created by s. 3(3) would be impressed with a lien and would have priority over other claims: Lien on trust funds 5

(1) Every person for whose benefit a trust is created by

section 3 or 4 has, subject to the provisions of that section, a lien upon the trust fund for the value of the work done, services rendered or materials supplied or furnished by that person and the lien takes priority over all general or special assignments and judgments, attachments, garnishments and receiving orders of the contract price or any portion of the price whenever received, used or made and of any right of set off .

(2) Subject to subsection (2) of

section 3 and to

section 4, the builder, contractor or subcontractor, as the case may be, shall distribute the money from time to time comprising the trust among the persons for whose benefit the trust is created, according to the liabilities of the builder, contractor or subcontractor to such persons, on a pro rata basis.

(3) Every owner who has entered into a contract for the construction of an improvement, and every builder, contractor or subcontractor is deemed to have notice of the lien upon the trust fund in his hands of the person for whose benefit the trust fund is constituted by this Act. (Emphasis added) [ 68 ] Of note is that the second part of s. 3(3), dealing with appropriation of funds by an owner, is now found in s. 6(4) of the BLA .

Likewise, substantially all of s. 5(1) of the MLA 1978 can now be found in s. 15 of the BLA , minus the reference to set-off. [ 69 ] The elimination of the beneficiaries’ right to priority over set-off from what is now s. 15 of the BLA occurred because it became apparent by the early 1980s that there were issues as to whether s. 5(1) of the MLA 1978 prevented an owner from setting off any claims they might have against the contractor and against trust funds. There was a divergence in the jurisprudence on this point.

Section 5(1) appeared on its face to prevent such action by an owner. [ 70 ] This problem was addressed in the document entitled Liens in the Construction Industry: A Report Prepared for The Hon. J. Gary Lane, Q.C., Minister of Justice by the Special Advisory Committee to the Minister of Justice on Builders’ Liens (Regina: Saskatchewan Justice, August 1984) (Chair: Gary G.W. Semenchuck, Q.C.) [ Semenchuck Report ].

The purpose of the committee that eventually prepared the Semenchuck Report was to examine the MLA 1978 and to make recommendations about changes to the legislation. [ 71 ] One of the issues the committee addressed was whether a trustee should be able to set-off against trust funds any claim that it may have against a beneficiary. The committee noted as follows (at 16): Under The Mechanics’ Lien Act in existence prior to the 1973 Act it was considered possible for an owner or other payer to set off funds over and above the holdback as against debts arising between the payer and the payee.

Even with the inclusion of trust provisions, this

probably continues under the present Act. Subsection 3(1) of the Act creates a trust of moneys in the hands of a builder, contractor orsubcontractor for the owner, builder, contractor or subcontractor which implies the existence of the power to set off and subsection 46(10)allows a defendant in an action to set off his claim against any plaintiff or defendant.

However, some commentators are of the opinion thatthe differences which existed between the Ontario and Saskatchewan Acts and the other Mechanics’ Lien Acts in Canada could haveeffected some changes with respect to the law of set off. … [72] I pause here to note that the reference to set-off in the Semenchuck Report must have been a reference to a contractual, commonlaw or equitable set-off since a statutory provision dealing with a possible set-off such as s. 13 of the BLA did not, at that time, exist.

Itmay thus be inferred that any right to set-off prior to the enactment of s. 13 arose from those sources. [73] The MLA 1978 had created a statutory trust for monies owed by the owner to a contractor. At page 17, the Semenchuck Reportidentified that, in the builders’ lien context, this created an issue where owners could not use trust monies to complete an abandonedcontract, as the monies had to be paid to all beneficiaries first, pursuant to s. 3(3).

The authors of the report also expressed concern that,because of s. 5(1), the trust created by that Act “may have eliminated the right of set off” and, further, that the lien upon the trust fund wasstated to take priority over all types of claims including set-off. [74] In counterpoint, the committee referred to the decision in Board of Education of Northern Lights School Division No. 113 vSaskatchewan (1981), (SK KB), 15 Sask R 195 (QB) [Northern Lights], as a case where the owner had been allowed toset-off the cost of completion and the resulting damages against monies payable under the contract over and above the holdback.

I noteagain that the source of the right of set-off referred to in that case was not statutory. [75] The Semenchuck Report made specific recommendations about the introduction of a provision like s. 13 of the BLA and thescope of set-off that should be allowed in respect of trust monies, noting at pages 19–20 that: It is difficult to understand a policy which precludes the right to set off as long as the debt which is the amount of the set off arose as aresult of the improvement. … … The Committee was concerned that to allow set off with respect to debts, claims or damages not incurred on the construction project wascontrary to the principle of ensuring that money with respect to a particular project should be kept in the construction pyramid.

With thislimitation, the Committee resolved that the legislation should reflect the decision that a trustee be allowed to set off. [76] Again, the reference to set-off arising as a result of the improvement is to a non-statutory set-off. [77] The committee was also concerned with ensuring that debts, claims or damages unrelated to the project not be allowed to beset-off against trust funds because it would be contrary to the principle that the money with respect to a particular project should be kept inthe construction pyramid.

The committee therefore recommended that this potential confusion be clarified in the new builders’ lienlegislation in this way (at 20): A trustee should be able to set off, as against his beneficiary, debts, claims or damages incurred with respect to the improvement as to allamounts in his hands up to but not including the holdback. [78] Given this background, the text of s. 13 of the BLA can be understood to reflect the policy considerations discussed in theSemenchuck Report.

It specifies the scope of set-off allowed, i.e., to allow set-off by the trustee so long as the claims are related to theimprovement and so long as the set-off does not encroach on a statutory holdback. [79] The words of s. 13 clearly keep the money within the construction pyramid.

It is clear that the Legislature intended the right toset-off against trust monies to occur in limited circumstances and that it did not intend to confer a broad right to set-off against trust moniesby statute. [80] However, knowing that the right of set-off in s. 13 is designed to keep the money within the construction pyramid does not tellus anything about what the nature or source of the set-off was intended to be.

The Semenchuck Report makes no mention of the commonlaw rule prohibiting set-off by a trustee against a beneficiary, nor does it explicitly discuss the source of the set-off to be advanced by anowner. [81] From reading the portions of the Semenchuck Report relevant to s. 13 as a whole, it may be inferred that the set-off referred towas in the nature of one that is contractual, legal or equitable.

Put another way, the discussion leading to the recommendations in theSemenchuck Report assumed that the purpose of any statutory clarification of the right to set-off was to preserve those set-off rights theparties already had, i.e., legal, equitable or contractual. 4. The jurisprudence [82] The case law on s. 13 of the BLA in Saskatchewan does not directly address the issues raised in this appeal, but maynevertheless be useful in determining its effect. [83] In Graham Construction and Engineering

(1985) Ltd. v Weyburn (City) (1989), (SK KB), 81 Sask R 8(QB), an electrical subcontractor abandoned the subcontract and, subsequently, deficiencies were discovered in the work it had done. Thegeneral contractor applied to vacate the liens of two suppliers to the subcontractor, arguing that, pursuant to s. 13, it had a right to set-offof its claim for damages owed by that subcontractor against the trust monies owed to that subcontractor in excess of the holdback.

TheCourt agreed that s. 13 supported its argument and that the lien claimants were not entitled to claim against the trust monies in the hands ofthe applicant. The Court found that the trust sections required privity of contract and there was accordingly no trustee-beneficiaryrelationship between the suppliers and the general contractor that would allow the suppliers to enforce their liens. There was no discussionabout the source of the general contractors right of set-off.

[84] In Board of Education for Saskatoon School District No. 13 v Building Speciality Sales Ltd. (1993), (SKKB), 107 Sask R 110 (QB), the Court held that the owner was entitled, pursuant to s. 13 of the BLA, to retain from the contract price anamount sufficient to cover the deficiencies. The Court did not consider whether the right to set-off arose out of contract, law or in equity,or, for that matter, whether it was a purely statutory right. [85] In Majestic Contractors Ltd. v N.C.L.

Contracting Ltd. (1994), (SK KB), 121 Sask R 175 (QB), MajesticContractors Ltd. [Majestic] paid monies into court in connection with a lien action brought by a subcontractors to one of Majestic’scontractors. The monies paid into court represented the outstanding balance due to the contractor. Majestic applied for payment of themonies out of court claiming a set-off against the contractor with respect to legal costs, taxes and other costs. The case turned on whetherthe expenditures were connected or linked to the improvement.

However, the Court considered the operation of s. 13 and found that s. 13gave Majestic the right to claim a set-off. [86] The Court in that case went on to comment on the Northern Lights case and said: [11] Mr. Justice Wimmer in Board of Education of the Northern Lights School Division No. 113 v. Saskatchewan, Government of etal., supra, held that while s. 5(1) of The Mechanics’ Lien Act, R.S.S. 1978, c.

M-7, provides that all funds withheld by an owner or personprimarily liable on the contract constitute a trust fund against which every person for whose benefit the trust was created has a lien, theowner or person primarily liable on the contract has the right to set off the cost of completing the improvement and any damages sufferedas a consequence of the non-completion against the moneys payable under the contract the [sic] exceed the amount of the statutoryholdback.

He based his finding on the principle that the person primarily liable on a contract “ought to be entitled, so far as possible, to getthe work at the contract price” agreed on but funds payable under one contract cannot be set off against claims under another contract. [12] In my view the decision in Northern Lights recognizes that the common law right to a true set-off is not abrogated by TheMechanics’ Lien Act but procedural rights of set-off are abrogated.

A true set-off means something in the nature of a defence: where claimand cross-claim are merged and the lesser thereby being extinguished as distinguished from a procedural set-off which permits twounrelated claims to be balanced up and a net judgment given: Stooke v. Taylor (1880), 5 Q.B.D. 569. … [18] In my judgment the trust provisions in the Act constitute a substantial change from the trust provisions contained in TheMechanics’ Lien Act of Saskatchewan, which it replaced and the trust provisions contained in the Mechanics’ Lien Act for New Brunswickand British Columbia.

As a result, decisions dealing with such Acts are of limited assistance in interpreting the provisions of ss. 13 and28(3). However, following the reasoning in Northern Lights, [Belanger v Pointer Construction Group Ltd. (1984), (ABKB), 31 Alta LR (2d) 320 (QB)], [S.I. Guttman Ltd. v James D.

Morky Ltd., (ON CA), [1969] 1 OR 7 (Ont CA)] and[Standard Industries Ltd. v Treasury Trails Holdings Ltd. (1976), 24 CBR (NS) 8 (Ont Co Ct)], I conclude that the right to a true set-offby a payer is not obviated or modified by the Act beyond requiring the debts or unliquidated claim to be set off relate to the improvementwhich is the subject of a construction contract between the payer and payee. … [22] I have considered the Subcontractors’ argument that a set-off can only be asserted under s. 13 with respect to debts andunliquidated damages related to the completion of an improvement, and have rejected it for the following reasons.

First, the suggestedlimitation would be inconsistent with the purpose and operational effects of the Act outlined by Cameron J.A. in [Town-N-CountryPlumbing and Heating

(1985) Ltd. v Tokarski (1991), (SK CA), 86 DLR (4th) 716 (Sask CA)], and therefore could nothave been intended. Second, the suggested limitation would diminish that right of set-off to a right lesser than existed under TheMechanics’ Lien Act which the Act replaced. Any intent to abrogate the right to a true set-off recognized in Northern Lights must beexpressed in clear terms. No such intent is set forth in the Act.

Third, s. 13 is clearly patterned after s. 12 of the Ontario Construction LienAct with the phrase “related to the improvement” being added not for the purposes of obviating the operational effects of s. 12, but tomoderately limit them to true set-offs. (Emphasis in original) [87] In Thunderbrick Ltd. v Yorkton (City) (1995), (SK CA), 128 Sask R 241 (CA), the owner had paid anamount into court in excess of the ten per cent holdback. The general contractor claimed a right to set-off against the funds for damagesagainst a subcontractor under s. 28 of the BLA.

The case turned on whether the general contractor could set-off against a subcontractorwith whom there was no privity of contract. In obiter, Gerwing J.A. commented with respect to s. 13, as follows: [29]

Section 13 of the Act makes provision for set-off between a trustee and his beneficiary allowing that the trustee may retain “anamount that, as between himself and the person he is liable to pay under a contract or subcontract in relation to the improvement is equalto the balance in the trustee’s favour ...”. The wording which describes the set-off available is identical to the words used in s. 28 exceptthe words “under the contract or subcontract in relation to the improvement” are added.

This addition is necessary because there is nofurther or other definition of trustee in the Act, whereas the term “payer” used in s. 28 is previously explicitly defined as the personresponsible to pay “for the services or materials provided to an improvement under a contract or subcontract”. The language which limitsthe set-off is in effect, identical in both sections. [30] With s. 13 there cannot be any ambiguity about the application of set-off; the trust only exists between those related directly. Itwould be very odd if exactly the same language is to give rise to an entirely different meaning in s. 28(3).

It may be argued that collectionof a lien is intended to be governed by a distinct set of rules than those applicable when relying on the trust; however, there is noindication in print or in policy that the alternate remedies are governed by disparate goals. [88] To summarize, the jurisprudence thus far is inconclusive as to whether the right of set-off in s. 13 is free-standing or if it mustbe based on an existing contractual, legal or equitable right. 5. Analysis

[89] The heart of the dispute is whether s. 13 gives rise to a free-standing right to set-off or whether it preserves a right of legal,equitable or contractual set-off, as KPCL argues. Although the parties argued the issue, the judge did not decide it. [90] Prior to the enactment of s. 13, the set-offs claimed by an owner were founded on contractual, legal or equitable bases. Thatmuch is clear, considering the comments in the Semenchuck Report.

That report focused on the problems with the provisions in the MLA1978, which appeared to allow the trust’s priority over an owner’s right of set-off, be it legal, equitable or contractual. The concern, in myview, was to make it clear that there should be a provision that allowed such set-offs to continue. [91] If s. 13 were a free-standing right without more, then it is possible that the parties could not contract to eliminate any right ofset-off or choose to remain silent on the matter, as in this case.

This is because s. 99 requires that all contracts conform to the provisions ofthe BLA, which would include a right to the s. 13 statutory set-off in all cases, no matter what the contract said. [92] The jurisprudence suggests that the common law and the law of contract is not ousted, except insofar as it is inconsistent withthe BLA. On this basis, the parties should be free to bargain for a right to set-off. This factor points to s. 13 not being a free-standing rightof set-off. [93] The use of the word “may” in s. 13 also suggests that the set-off is not a free-standing statutory right. The fact the

section ispermissive suggests that there must be some proper basis for the deduction apart from the provision itself. [94] Taking all the foregoing into consideration, I conclude that the right in s. 13 is not free-standing and was intended to merelyallow for any claims, as may be properly advanced by an owner on a contractual, legal or equitable basis, to be set-off against the trust.This conclusion fits comfortably with (

a) the common law, which provides that a trustee has no right of set-off against trust property, and(

b) other provisions of the BLA.

Section 6, for instance, imposes a trust on the owner (trustee) in favour of the contractor (beneficiary)where money becomes payable to the contractor. Once payable, the owner is expressly prohibited from appropriating or converting “anypart 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 theimprovement owed to him by the owner” (s. 6(4)).

Section 43 also merits consideration. That

section sets out that where a contract hasbeen certified as being substantially complete (provided a lien has not been registered), a payor may pay out the holdback withoutjeopardy if the money is otherwise due and payable under the contract. [95] Further, an

interpretation that endorses CP’s position would ostensibly give owners the right to retain funds that are otherwisedue and payable under the BLA in favour of unproven claims. Such a result is inconsistent with the intricate legislative structure thatstrives to balance the commercial interests of owners and financiers with those who contribute service or material to the improvement ofreal property on credit. [96] Based on this conclusion and keeping in mind that the judge found there was no legal or equitable right to set-off, it remains tobe determined if CP has a contractual right to set-off. E.

Did the judge err in failing to interpret clause 45.9 of the Contract? [97] As noted above, this Court remitted the question of whether CP was entitled to retain the Holdback pursuant to the Contract orotherwise to the judge. The judge determined that CP could not avail itself of legal or equitable set-off to retain the Holdback. Thosedeterminations were not challenged in this Court. However, the judge was required to go further to examine if the Contract allowed suchretention.

This necessitated her examining the Contract and specifically interpreting clause 45.9 thereof. [98] KPCL submits that the judge failed to interpret that clause and instead merely determined the question of whether the Contractexpressly excluded the operation of s. 13. [99] CP argues that the judge reasonably interpreted clause 45.9. However, CP does not state anywhere in its factum what thejudge’s

interpretation was, proffering instead its own view of what the clause means. While the judge spent considerable time reviewingthe arguments of the parties and the case law germane to the

interpretation of clause 45.9, her only conclusion dealing with the clause wasas follows: [40] It is apparent that clause 45.9 is not clear in specifying when CP may retain monies out of the Holdback. The clause principallydeals with the contractor’s right to payment of the Holdback. Seemingly as an aside, the clause permits CP to retain monies from theHoldback in certain circumstances. The breadth of these circumstances is in issue here. [100] As I read her decision, the judge avoided the issue of

interpretation of the clause by determining that the right of set-off must beexpressly excluded from the Contract and, because it was not so excluded, then CP could set-off its claim against the Holdback unders. 13 of the BLA.

I note parenthetically that the judge’s determination that a right of set-off must be expressly excluded by contract appearsto run contrary to the Supreme Court’s holding in Holt v Telford, (SCC), [1987] 2 SCR 193 at 202, where it found that, inthe absence of an agreement to set-off, a party’s right to the same must be found in law or in equity. [101] Reading the Decision as a whole, I conclude that the judge focused on s. 13 and failed to interpret clause 45.9 to determinewhether it provided CP with a right to retain the Holdback.

In light of this failure, it falls to this Court to do so. [102] I turn first to the principles governing contractual

interpretation. They are well established. The

interpretation of a contractinvolves an inquiry by the court into the objective intent of the parties in the context of the surrounding circumstances applying the legalprinciples of

interpretation: Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53 at para 49, [2014] 2 SCR 633. While, in every case,contractual

interpretation begins with the words of the contract, a court must look to those words in the context of the circumstancessurrounding its making. As explained in Sattva, the “nature of the evidence that can be relied upon under the rubric of ‘surroundingcircumstances’ will necessarily vary from case to case” (at para 58). [103] I turn to the Contract first. As a preliminary observation, the Contract is silent as to any general right of CP to set-off an amountowing to it by KPCL or any claim against KPCL for damages against monies owing under the Contract or the Holdback, per se. KPCL

submits that, insofar as clause 45.9 provides CP with a right to retain the Holdback, the parties have bargained for a very narrow right. I agree with this submission. The General Terms and Conditions attached as

Schedule A to CP’s contracts with the other two consultants it is suing in the CP Claim (the same action for damages and negligence in which it is suing KPCL), i.e., Thurber Engineering Ltd. and Clifton Associates Ltd., provide for a general right of set-off. [ 104 ] Interestingly, in clause 6 of

Schedule B, CP and KPCL specifically bargained for the inclusion of a term that provided that if it failed to substantially complete the work by a certain date, it would pay $25,000 per day to CP as damages until substantial completion and that CP may set-off those damages against any amount owing by it to KPCL.

This clause is significant in that it demonstrates that the parties clearly and deliberately directed their minds to, and bargained for, a situation where CP could set-off against monies owing to KPCL pursuant to the Contract for what can be considered to be a breach of contract. [ 105 ] Given the lack of a general right of set-off in the Contract, it is common ground that if CP has a contractual right to retain the Holdback, it must be found in clause 45.9.

I repeat clause 45.9 for ease of reference: 45.9 Immediately following the issuance of the certificate of Completion of the Work, the Engineer will issue a certificate for payment of holdback monies.

The holdback monies authorized by this certificate shall become due and payable after forty-five (45) days of the date of the certificate of Completion of the Work, providing that CP may retain out of such holdback monies any sums in accordance with the terms of this Agreement, or required by law or otherwise to satisfy any claims against CP or the Work or other monetary claims against the Contractor and enforceable against CP and that the Contractor has submitted to CP a Statutory Declaration and/or other evidence satisfactory to CP, that all accounts for labour, Workers’ Compensation, subcontracts, Materials, Equipment and other indebtedness which may have been incurred by the Contractor in the Completion of the Work and for which CP might in any way be held responsible have been paid in full except holdback monies properly retained. (Emphasis added) [ 106 ] I note first that this clause is found in the General Terms and General Conditions attached as

Schedule A to the Contract. As observed above, to that extent, it appears to be part of the standard contractual terms of general application used by CP in its contracts. The

Schedule contains many standard clauses, some of which apply to more than one jurisdiction and some of which, understandably, include references to liens despite, as mentioned earlier, that the lien provisions of the BLA do not apply in this case. [ 107 ] An example of such a clause is the following: GC37 WAIVER OF LIEN 37.1 Except where prohibited by law … The Contractor shall not file or claim any privilege, lien or hypothec, or other document purporting to claim such privilege, lien or hypothec against the Work or the lands comprising the Site of the Work, and in the event any Subcontractor, Material Supplier or other person whatsoever should file such document, the Contractor shall immediately obtain the discharge thereof , and in the event CP is required to obtain such discharge, or is made a party to any litigation thereto, the Contractor shall indemnify CP for all costs and expenses, including legal costs, incurred as a result thereof. (Emphasis added) [ 108 ] This clause uses the word “hypothec”, which is a common term in the civil law of Quebec.

It also refers to liens that may be filed by the contractor and or subcontractor against the “Work” or the lands comprising the site of the “Work”. [ 109 ] I return to clause 45.9. It was described by the judge as principally dealing with the contractor’s right to payment of the Holdback and CP’s right to retain the Holdback under certain circumstances. The Holdback is the ten per cent holdback established in paragraph 5 of

Schedule B to the Contract. [ 110 ] The term “holdback” and its purpose and function is well known. It is the percentage of a contract price that is reserved until the contract is completed and then paid out to the payee, usually after the statutory period required to keep the holdback has expired. The purpose in keeping a holdback is to ensure that it is available for the payment of any liens or claims against the land or improvements. [ 111 ] The purpose of clause 45.9 can also be discerned by looking at its structure.

The first part of it provides that the Holdback – in this case, a non–statutory holdback – will be kept for 45 days and then paid out to KPCL. This part of the clause achieves much the same purpose as s. 43(1) of the BLA , which provides that where no lien is registered, the contract has been certified to be substantially performed and the money is otherwise due and payable under the contract, then the holdback can be paid out to the payee 40 days after substantial performance.

Under s. 43(1) of the BLA , if a claim of lien is filed, the payor of the holdback would be entitled to retain it and is not compelled by s. 43 to pay it until that claim is resolved. [ 112 ] The second part of clause 45.9, found immediately after the part that authorizes payment following the expiration of 45 days, deals with the situation where a claim has been made with respect to the Project that would affect the payment of the Holdback. The existence of such a provision is understandable. Many aspects of lien legislation would not apply to the Project because CP is a federal undertaking.

However, even if the Project is not lienable per se, CP would seek in its General Terms and General Conditions to contractually protect itself against lien claims in the same way that the legislation offers protection for the owner. [ 113 ] There are three types of claims under clause 45.9 in respect of which CP is contractually entitled to retain all or a portion of the Holdback: (

a) claims against CP; (

b) claims against the “Work”; or (

c) other monetary claims against the contractor (in this case, KPCL) and enforceable against CP.

As noted, the contractual retention of the Holdback in these three scenarios achieves a similar result to that where the lien and holdback provisions of the BLA apply and permits CP to retain the funds until the claim or claims are resolved. [ 114 ] Given the foregoing, the structure and wording of clause 45.9 suggests that its purpose is to provide a mechanism that certifies when payment of the contractual Holdback can be made to KPCL, but also allows CP to protect itself against claims on the Project by retaining the Holdback until those claims are resolved. [ 115 ] With regard to two of the types of claims allowing for retention of the Holdback, there is no difficulty understanding what they

mean. The meaning of “claims against CP” and “monetary claims against the Contractor and enforceable against CP” is obvious. Both relate to claims made by third parties against either CP directly or KPCL, and obviously would involvethe work done on the Project by those third parties. CP is not claiming it can retain the Holdback based on those scenarios. [ 116 ] Rather, CP seeks to retain the Holdback by relying on the definition of the term “Work” found in clause 1.1.17 of

Schedule A of the Contract, which reads: 1.1.17 “Work” means and includes anything and everything required to be done for the setting out, the execution and the completion and fulfillment of the Agreement Documents to the satisfaction of the Engineer. [ 117 ] CP argues that this definition describes, and is restricted to, the contractual obligation of KPCL to CP and therefore only CP can make a claim against the “Work” as defined.

It argues that the CP claim is a claim that KPCL failed to do the “Work” and that, on that basis, it is entitled to retain the Holdback. [ 118 ] However, the term “Work”, read in context, is not restricted to KPCL’s contractual obligation and its meaning in clause 45.9 is not equivalent to performance of the Contract. [ 119 ] How the term “Work” is used in the Contract is informed by various clauses, such as the following: 1.1.1 “Changes in the Work” means additions, deletions, substitutions, extensions, increases, decreases or other revisions to the Work within the general scope of the Agreement. … 1.1.18 The expressions “perform the Work” and “construct the Work” mean perform, construct, complete, protect, repair, replace, maintain and test the Work and every part thereof in conformity with the Agreement Documents, and variations of these expressions have corresponding meanings. … 8.1 The Contractor shall have complete control of the Work and shall effectively direct and supervise the Work so as to ensure conformance with the Contract Documents.

He shall be solely responsible for construction means, methods, techniques, sequences and procedures and for co-ordination of the various parts of the Work under the Contract. The Contractor shall be solely responsible for construction safety at the Site and for compliance with the rules, regulations and practices required by the applicable construction safety legislation. The Contractor shall furnish and maintain on the Site, at his expense a fully equipped on-site first aid station as required by any Workers’ Compensation or Work Safety legislation. [ 120 ] The term has some flexibility.

As used in these clauses, the term has a physical connotation and is the object of the contractual obligation of KPCL. The term “Work”, in the broader, physical connotation, is also used elsewhere in the Contract. [ 121 ] In clause 37.1 of

Schedule A, “Work” is used in the context of liens that can be or have been filed. The words “ against the Work or the lands comprising the Site of the Work” appear to refer to the actual physical improvement that results from the work done by the suppliers of labour, services and materials. Used in this way, it is similar to the definition of the terms “improvement”, “services” and “materials”, found in subsections 2(1) (h), (

j) and (

q) of the BLA , all of which come into play when a lien is filed under s. 22 of the BLA . The way the term is used in this clause, “Work” must be interpreted to be referable to lien claims. [ 122 ] Taking into consideration that clause 45.9 is essentially a provision that is designed to provide CP with the same kind of protection against claims in the nature of liens that it would have if lien legislation applied, I find the term “Work”, as used therein, has a meaning similar to that in clause 37.1. [ 123 ] Admittedly, the improvement in this case may not be capable of having a lien registered against title.

However, not all aspects of a federal undertaking are immune from liens. The point is that a third party may nevertheless try to file a lien against the land or improvements. Certainly, CP would, as a matter of sound commercial principles and good business practice, want to retain monies that might compensate it for any financial jeopardy as a result of any claims in the nature of liens on the physical work. [ 124 ] In my view, as used in clause 45.9, the term “Work” has a broad meaning and refers to anything and everything that involves the services and materials to be provided under the Contract.

In this context, it refers to what KPCL has done to improve the property and speaks to claims against the improvement or the Project itself. [ 125 ] I conclude that the reference in clause 45.9 to “Work” refers to the improvements KPCL created as part of the Project. [ 126 ] The words “claims against … the Work ” appear between references to claims against CP and claims against KPCL by third parties enforceable against CP. In my view, the claim of CP is not the type that is caught by clause 45.9.

The operative part of clause 45.9 consists of the words “any claims against CP or the Work or other monetary claims against the Contractor and enforceable against CP”.

Examined as a whole, these words suggest that the sorts of claims that would justify retention of the Holdback are those made by third parties against the financial interest of CP and not claims CP itself would make against its own contractor for negligence or breach of contract. [ 127 ] Of course, CP urges this Court to find that the parties have bargained for a provision allowing only CP, on the basis of the term “Work”, to retain part of the Contract monies. It submits that this provision was designed to allow it to claim against KPCL for failures to adhere to the Contract and perform it satisfactorily.

However, the fact remains that CP bargained for a general right of set-off with other contractors related to the Project that would accomplish that intent but not with KPCL. It specifically contracted with KPCL for what amounts to a set-off for damages incurred as a result of any delay by KPCL, but nothing more. [ 128 ] In this context I cannot find, objectively speaking, that the parties have bargained for a provision is neatly tucked away between

references to claims by third parties that allows CP to retain trust funds for alleged non-performance by KPCL. Looking at the Contract as a whole, clause 45.9 in particular, and the circumstances surrounding the Contract, I cannot determine that the objective intention of the parties was to permit such a claim to be made by CP. [ 129 ] I conclude that CP does not have any basis in contract to retain the Holdback monies. VI. CONCLUSION [ 130 ] Having neither a legal, equitable or contractual right of set-off against the Holdback, CP must pay it to KPCL. [ 131 ] The appeal of KPCL is allowed.

KPCL shall have its costs in the usual way. With respect to KPCL’s application to perfect the appeal, there will be no order as to costs. “Ottenbreit J.A.” Ottenbreit J.A. I concur. “Schwann J.A.” Schwann J.A. I concur. “Kalmakoff J.A.” Kalmakoff J.A.