Payment disputes on construction projects are extremely common. With margins being low to begin with, contractors often find themselves financially strained and unable to cash flow their business operations to complete projects. One common form of relief available to contractors is factoring, where a company (the factor) purchases a contractor's account receivable for a discount via a three-party agreement with the project owner and the contractor.
But what happens if the project owner fails to pay the factor, the contractor becomes insolvent, and builders' liens are registered by subtrades against the project lands? Is the project owner still liable for the factored invoice? Does the amount of that factored invoice form part of the lien fund? The Alberta Court of Appeal was faced with this scenario in Factors Western Inc. v DCR Inc., 2021 ABCA 433.
Background
Point Design, as owner, contracted with DCR, as contractor, to complete a construction project. DCR issued an invoice to Point Design, which was then purchased by Factors Western (the "Factored Account"). Before Factors Western issued payment to DCR for the Factored Account, Point Design signed an Acknowledgement stating they would pay Factors Western the Factored Account "without dispute or setoff."
Point Design did not pay the Factored Account. Later, DCR defaulted on its contract with Point Design. DCR failed to pay all of its subcontractors, and subcontractors registered numerous builders' liens against the owner's lands. Point Design paid funds into Court as security to discharge the liens.
Factors Western sued Point Design for payment of the Factored Account. One lienholder, Slimdor, argued that the Factored Account formed part of the lien fund. Point Design refused to pay Factors Western, in light of Slimdor's argument that the lien fund included the Factored Account. If the Factored Account was part of the lien fund, Point Design would potentially be liable for the same amount twice: once to Factors Western directly, and second to the lienholders via an owner's obligation to retain the lien fund.
At a summary trial, the Court held that Point Design was liable to Factors Western for the full amount of the Factored Account, and that the Factored Account formed part of the lien fund - meaning that the owner was liable for the same amount twice. Point Design appealed both findings.
Court of Appeal Decision
The Court of Appeal upheld the trial judge's finding that Point Design was liable to Factors Western for the full amount of the Factored Account, but allowed the appeal with respect to lien fund quantum.
The Court of Appeal's reasoning at the heart of both issues was that the contract between Point Design and DCR was separate from the factoring agreement between DCR, Point Design, and Factors Western. Once Factors Western purchased the Factored Account from DCR, it constituted an "absolute assignment," and the invoice ceased being a part of the contract between DCR and Point Design. It became a part of a separate, three-way contract between DCR, Point Design, and Factors Western.
A Factored Invoice is No Longer a Part of the Original Contract
Point Design argued it should not have to pay the entirety of the Factored Account, as it had already paid numerous lien claims, and these lien claims would have reduced the amount owing to DCR under that contract.
The Court of Appeal stated that Point Design's interpretation would ignore both the consequences of entering into a factoring arrangement and the plain wording of the Acknowledgment Point Design signed. The wording of "without dispute or setoff" in the Acknowledgement removed any defences Point Design may have had under its contract with DCR.
As well, the Court noted the debt owed to Factors Western was a contractual debt, which was not a liability under the Builders' Lien Act ("BLA"). Therefore, Point Design could not rely on section 25 of the BLA (limiting an owner's liability under the BLA to the lien fund) as a defence.
The Lien Fund Arises from Holdbacks on the Contract Between Owner and Contractor
The trial judge reasoned that the Factored Account should form part of the lien fund as it was "an amount payable under the contract" as set out in section 18.2 of the BLA. The Court of Appeal disagreed, for the same general reason Factors Western was entitled to its full debt claim - the Factored Account was part of a separate agreement.
In an owner-contractor relationship, there is one "contract" between them. The lien fund is created from statutory holdbacks on payments under this contract between owner and contractor. If an amount is not payable by the owner to the contractor pursuant to the terms of that contract, the amount does not form part of the lien fund.
The Court of Appeal found the trial judge erred in two ways when determining that the Factored Account formed part of the major lien fund:
- Firstly, by finding that the case of Iona Contractors Ltd (Receiver of) v Guarantee Co of North America, 2015 ABCA 240 had changed the law of builders' liens in Alberta. The Court clarified that this case merely summarized the law and both it and the cases summarized are still good law for interpreting the BLA, and
- Secondly, by applying Saskatchewan case law, as the Alberta and Saskatchewan Courts of Appeal have taken different interpretations of the BLA, and the respective Acts are quite different in many respects.
Takeaway
The Court of Appeal's ruling confirms that factoring accounts is a useful tool to assist with cash flow needs on construction projects. Under Alberta law, an owner who is either notified about or expressly acknowledges a Factored Account need not worry about the possibility of being held doubly liable for the same amount. Once an account is factored, it is no longer owed by the owner to the contractor, and thus cannot form part of the lien fund.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
