Registering a construction lien against a property is a significant remedy that immediately triggers certain obligations and responsibilities for an owner. For that reason, the Construction Lien Act, 1990, c. C. 30 places an obligation on the party that is registering the lien to ensure the lien amount is accurate and not inflated.

A recent decision released by the Ontario Superior Court of Justice (Divisional Court) called HMI Construction Inc. v. Index Energy Mills Road Corp., highlights the pitfalls for a lien claimant in overstating its lien amount. In HMI Construction Inc. v. Index Energy Mills Road Corp. the owner purchased an energy generating plant. HMI was hired by Index to update the building and convert it into a biomass fired cogeneration facility. A falling out occurred between the parties and HMI registered two liens in the total amount of $32,807,468.11 against the property.

Index disputed the lien amount and elected to cross examine HMI’s affiant on the lien. It was determined that HMI used a “costs plus” approach in calculating that quantum of the lien amount. In essence, HMI calculated is actual costs, materials, equipment and labour and then added a 10% markup for profit to reach $32,807,468.11. The problem with this approach was that HMI and Index were on a fixed price contract. The court determined that absent approved changed orders, a contractor cannot include in a claim for lien extra charges over and above the contract amount, despite the fact that the contractor’s costs were more than usual or expected.  After reviewing the fixed price contract, and HMI’s progress draws, the Divisional Court affirmed the lower court’s determination that the maximum lienable amount was $13,872,154.86. As a result, HMI was found to have exaggerated its lien amount by $19,000,000. Index was successful on the appeal, and only had to post $13,872,154.86 as security in order to vacate the liens. Index was also awarded costs of the lower court motion and the appeal.

It is noteworthy that the Divisional Court ruled that “HMI is fortunate indeed that the motions judge exercised his discretion not to discharge the liens entirely, given all the circumstances.” Accordingly, it needs to be highlighted that if lien claimants are haphazard in calculating their lien amounts, the court has discretion to discharge the lien entirely if it is improperly inflated. Additionally, pursuant to section 86 of the Construction Lien Act, a party (or that party’s lawyer) can be ordered to pay a severe cost award if found to have willfully exaggerated the amount of its lien. The lesson here is that caution and care needs to exercised when calculating a lien amount. Lien claimants should consult with knowledgeable counsel in order to ensure the lien is properly calculated, otherwise, they run the risk of unwittingly losing their lien rights or making themselves vulnerable to an adverse cost award.

Jeff Van Bakel

Advocates LLP

Jeff practices predominantly in construction litigation, professional negligence defence and commercial litigation. Jeff takes pride in providing advice to his clients aimed at finding solutions. When a resolution cannot be reached, Jeff regularly appears before the Superior Court of Justice, the Divisional Court and the Court of Appeal for Ontario and aggressively advocates on behalf of his clients’ interests.

The Construction Lien Amendment Act of Ontario (Bill 142) was given Royal Assent in December 2017. Among its many changes, it will introduce an adjudication process. The effective date of the necessary regulations allowing adjudication is currently set for late 2019. By that time, whether your contract includes adjudication procedures or not, these procedures will prevail.

In the 1990’s the Province of Ontario experimented with mandatory mediation as part of the Court process. It was a good thing. These days it is common for lawyers handling construction disputes, sooner or later, to find their way to a mediator to help the clients explore settlement possibilities.

This new Construction Act will introduce “prompt payment” provisions. From my perspective as a Construction Litigation lawyer, the single most significant of those changes will be the Adjudication process.

Part II of the new Act describes it as a Construction Dispute Interim Adjudication. In less than 30 days it will produce in an interim decision rendered upon a single issue in dispute, by an experienced construction adjudicator. Disputes that can be referred to these adjudicators include: payment disputes; disputes over change orders whether issued and approved or not; disputes over the release of holdbacks or other payments subjected to back-charge. The disputes may only be referred to adjudication if the contract under which the dispute arises has not been completed. Issues referred to adjudication must be dealt with on a stand-alone basis. Multiple issues cannot be referred as one dispute. Notwithstanding these rules, the parties and the adjudicator have some discretion to agree to adapt things to achieve a timely cost effective process.

Adjudicators will be vetted for their skills and training by a Ministry Authorized Nominating Authority, which will create and manage a roster from which parties may choose their adjudicator. They will either be chosen from the roster by agreement of the parties, or will be appointed by the Nominating Authority, upon the request of a party.

The Adjudication process will be expedited. Within 5 days of accepting an appointment to adjudicate the party demanding adjudication is to have submitted their supporting documentation to the adjudicator. The process thereafter is under the control of the adjudicator who is to ensure it is conducted fairly and impartially – rendering their final decision no later than 30 days from receipt of the applicant’s documents. The adjudicator may attend at the site, interview witnesses, hire experts, and has other broad powers to investigate so as to be able to render a decision with reasons in support on or before the 30th day. A late decision will be unenforceable.

An adjudicator’s decision must be acted upon by the parties within 10 days of the determination, failing which a party may suspend further work under the contract. Although it must be acted upon, the decision may be disputed by either party through subsequent litigation or arbitration. The written decision of the adjudicator will be admissible in that trailing litigation.

Together with the prompt payment provisions which require a notice of non-payment detailing all the reasons for a backcharge, the new ability to demand adjudication is going to dramatically change the payment process for our construction industry.

In a decision released September 30, 2016, Master Wiebe has provided clarity with respect to the requirements for a valid Written Notice of Lien pursuant to section 24 of the Construction Lien Act (the “CLA”).

Those familiar with section 24 of the CLA will know that it is a powerful tool for unpaid parties to use in holding up the flow of funds from an owner prior to taking the formal step of registering a construction lien.

Section 24 provides that a payer may pay a contractor or subcontractor up to 90 per cent of the price of services or materials supplied under that contract or subcontract unless, prior to making the payment, the payer has received a “written notice of a lien”.  Where the payer has received a written notice of a lien, they must retain an amount sufficient to satisfy that lien, in addition to the normal statutory holdback, before making further payment.

The question before the Court in the case of Trenchline Construction Inc. v. Unimac-United Management Corp., 2016 ONSC 6136, was what amounted to a “written notice of a lien” sufficient to require the owner to retain what is referred to as the “notice holdback”.

The Trenchline case involved Trenchline as subcontractor, Unimac as general contractor and Metrolinx as owner.  Trenchline ran into issues collecting payments from Unimac and therefore between May and December of 2011 issued what it argued amounted to ten written notices of a lien to Metrolinx claiming a total owed to it of $1,085,210.09.

Master Wiebe thoroughly reviewed the case law under both the CLA and the former Mechanics Lien Act and delineated five elements that must be present in order for a communication to amount to a “written notice of a lien”.

The first four elements identified by Master Wiebe arise directly from the definition of “written notice of a lien” found in section 1 of the CLA.  These are:

The fifth element identified by Master Wiebe, which has its origins in the Ontario Court of Appeal decision in Craig v. Cromwel (1900), 27 O.A.R. 585, was described by the Master as being “a clear warning to the payer of the notice giver’s present intention to preserve a lien.”  Master Wiebe made it clear that it is not sufficient to simply notify the payer that there is an issue with payment or even that a lien might be registered at some time in the future.  The notice must be clear that the lien claimant wants the normal flow of money to stop.

In acknowledging that written notices of lien can be, and often are, delivered by non-lawyers, on site, in real time, Master Wiebe confirmed that it is substance, not form that is important.  There is no requirement to use the word “lien” and it can be as simple as stating that the payer should stop making payments.  The bottom line is however that the notice giver’s clear and present intention to lien or require payments to stop, must be communicated.

Can you join an unjust enrichment claim with your construction lien claim in the same action? The Court of Appeal thinks not, though the Divisional Court was not so categorical.

You expect a construction lien action, by its very name, to assert a contractor/subcontractor’s statutory right, under the Construction Lien Act, to relief against an owner’s real property, or against the security posted in lieu of a claim against the real property. It is also expected that the contractor/subcontractor will include a claim for breach of contract against the party immediately above it in the construction ‘pyramid’. What has come to be a fairly common practice is to also claim unjust enrichment against everyone, the contractor/subcontractor immediately above the lien claimant, as well as the owner with whom the lien claimant often has no direct relationship. However, just because it is common practice does not mean that it will pass legal muster.

Indeed, this was the result in Yorkwest Plumbing Supply Inc. v. Nortown Plumbing (1998) Ltd., 2016 ONCA 305 where a unanimous panel of the Ontario Court of Appeal held that any unjust enrichment claims were barred by the Construction Lien Act itself, going further than, and apparently overruling, the earlier decision of a unanimous Divisional Court in the case (2014 ONSC 5655).

The Facts

The facts are fairly straightforward. Yorkwest Plumbing Supply Inc. (“Yorkwest”) was a plumbing supply subcontractor of Nortown Plumbing (1998) Ltd. (“Nortown”) on two home development projects, one owned by Intracorp Projects (Milton on the Escarpment) Ltd. (“Intracorp”) and the other by Burl 9 Developments Limited (“Burl 9”). In the course of its subcontract Yorkwest supplies material to Nortown on credit. Before the projects are finished, Nortown is bankrupt. Yorkwest claims it is owed $39,846.69 for materials supplied on the Intracorp project and $63,535.24 for materials supplied on the Burl 9 project. Yorkwest registers a general lien against both projects in an effort to secure payment from Intracorp and Burl 9. Intracorp and Burl 9 respond with a motion for summary judgment on the basis that, among other things, Nortown’s general contract with both Intracorp and Burl 9 provided that liens would arise and expire on a lot-by-lot basis, precluding the general lien registered by Yorkwest. Intracorp and Burl 9 are successful and summary judgment is granted dismissing the action and discharging the liens. Yorkwest appeals to the Divisional Court. Its appeal is dismissed. Yorkwest appeals that dismissal to the Court of Appeal. That appeal is also dismissed.

The Decisions

The main issue  at all levels of court was whether Yorkwest could sustain a general lien against the owners notwithstanding the general contract’s specific provision that liens would arise and expire on a lot-by-lot basis. In that regard, a unanimous Court of Appeal confirmed that section 20 of the Construction Lien Act permitted an owner to contract out of the default general lien provisions and that the absence of a reference in section 20 to ‘subcontract’ did not alter the analysis. Indeed, the Court indicated that a subcontractor’s right to demand information from the owner under section 39 of the Act, including whether liens expired on a lot-by-lot basis, afforded subcontractors a sufficient procedural protection to justify the refusal to permit Yorkwest to register a general lien notwithstanding that it was not privy to the contract that abrogated that right.

Intracorp and Burl 9 had also taken issue with Yorkwest’s alternative claim against them of unjust enrichment. Regardless of its claim to a lien against their real property, Yorkwest also alleged that each of Intracorp and Burl 9 has been enriched by Yorkwest’s supply of material that was incorporated into each project, that it had suffered a corresponding loss, and that there was no legal reason (such as a contract) for that transfer of value. In dismissing this aspect of the appeal, the Court of Appeal’s reasons were brief and to the point:

[53]      Section 55 of the [Construction Lien Act] allows a plaintiff in a lien action to join in the action a claim for breach of contract or subcontract. In its statement of claim, the appellant pleaded that it was not paid pursuant to its agreement with Nortown, which was named as one of the defendants. However, the appellant did not plead breach of contract as against the respondent owners, Intracorp and Burl 9, as it had no contracts with them.

[54]      The Divisional Court held that to allow claims not referred to in s. 55 to be joined in the action, such as claims for quantum meruit or unjust enrichment, would amount to a refusal to apply the plain wording of s. 55. I agree. The Act is intended to provide a summary procedure for dealing with lien claims. By including s. 55, the Act further defines the extent and intent of actions that can be brought to enforce it.

[emphasis is mine]

In doing so, the Court of Appeal upheld the result at the Divisional Court, insofar as the Divisional Court refused to permit Yorkwest to continue its action against Intracorp and Burl 9 on the basis of unjust enrichment alone. In doing so, however, it glossed over the nuance in the Divisional Court’s decision. On the issue of the unjust enrichment claim, Marrocco A.C.J.S.C., writing for the panel, had held:

[44]           [Yorkwest] submitted that its claim should be permitted to continue its action on the basis of a breach of contract. [Yorkwest] also described its claims against [Intracorp] and [Burl 9] as claims for unjust enrichment and quantum meruit.

[45]           Section 55(1) of the Construction Lien Act provides that a plaintiff in an action may join a claim for breach of contract or subcontract with a lien claim.

[46]           Section 55 (1) permits the lien claimant to advance a claim based on services performed and acknowledged as received even if the contract for the provision of those services is ultimately not proven. Section 55 (1) permits the appellant to include a claim based upon a contract even if it turns out that the appellant is unable ultimately to prove the contract. Section 55 prevents personal injury or unrelated tort claims from being advanced in a lien claim because lien claims are intended to be summary in nature.

[47]           [Yorkwest] did not plead a contract with either [Intracorp] or [Burl 9]. [Yorkwest] did not plead a breach of contract by those persons. The affidavit of Gabrielle Pizzardi provided in response to [Intracorp] or [Burl 9] motions for summary judgment does not suggest that [Intracorp] or [Burl 9] contracted with [Yorkwest].

[48]           Yorkwest’s claims of unjust enrichment and quantum meruit in its statement of claim are not based on any pleading that there was a contract between [Yorkwest] and [Intracorp] or [Yorkwest]and [Burl 9].

[49]           Allowing [Yorkwest] to join claims for unjust enrichment or quantum meruit unrelated to contracts between [Yorkwest] and those persons, amounts to a refusal to apply the plain wording of section 55 (1).

[50]           Of course, it is possible to advance claims for unjust enrichment or quantum meruit in the absence of a contract. However, such claims cannot be joined with a lien claim due to the wording of section 55 (1) of the Construction Lien Act.

[51]           Accordingly [Yorkwest’s] claims for unjust enrichment and quantum meruit cannot be joined with this lien claim and there will be no order permitting this action to continue as a claim for breach of contract, unjust enrichment or quantum meruit.

Conclusion

On its face, the Court of Appeal’s decision is categorical: if your claim is not contemplated by section 55 of the Act then it cannot be jointed in your lien action. The Court of Appeal’s decision may be distinguishable on its facts from a case where, as the Divisional Court discussed, a subcontractor joins an unjust enrichment claim in its lien action against the general contractor with whom it did have a contractual relationship. However, it would seem that the Divisional Court’s analysis begs the question: if there is a contract between the subcontractor and the general contractor, then there is either no unjust enrichment claim at all, insofar as the contract is the legal reason for the transfer in value, or there is no contract, in which case the freestanding unjust enrichment claim against the general contractor is no different than the impermissible freestanding unjust enrichment claim against the owner.

The Divisional Court’s analysis appears to be concerned with the use of quantum meruit to secure compensation for contractors and subcontractors who perform work that is truly outside the scope of their contract or subcontract, but without entering into a new written agreement with the owner or contractor as to the terms of compensation for that extra out of scope work.  Even here, it may be better to characterize the arrangement between the owner/contractor and the contractor/subcontractor for the extra out of scope work to be an oral contract to do that extra out of scope work in exchange for fair compensation, the particulars of which compensation is to be agreed to at a later date and bypass altogether the messy question of whether your unjust enrichment claim will be permitted to proceed.

In the end, Yorkwest is a clear reminder from the Court of Appeal that construction lien actions are creatures of statute designed to advance a particular and narrow subset of claims to a quick resolution in a summary way. The practical upshot is that, as a lien claimant, you may join a breach of contract claim in your lien action, but nothing else. Of course, as the Divisional Court noted, if your claim against the owner, or anyone else, is truly in the nature of unjust enrichment, then there is no bar to commencing a separate action for that relief in the usual way and subject to the usual procedural requirements, but that is a topic for another day.

Court Holds 45 Day Lien Period Can Be Met Despite Subcontractor Not Being on Site For More than 45 Days Due to Scheduled Winter Shut Down.

What happens to a subcontractor’s 45 day lien rights when the work on site is interrupted due to a scheduled winter shut down? This is the issue Mr. Justice DiTomaso decided on July 9, 2016, in Toronto Zenith Contracting Limited v. Fermar Paving Limited, 2016 ONSC 4696.

The facts were straightforward.  Fermar was the general contractor on a major road construction project. It subcontracted some of the work to Zenith.  The subcontract contemplated three winter shutdowns with Zenith thereafter returning to the site to recommence its subcontract work. Zenith started its work in 2013.  The project went through the first winter shutdown. Zenith recommenced its work and worked on site until December 19, 2014, at which time the second winter shutdown began. During the second winter shut down, Zenith performed offsite work intended to become part of the improvement of the Project, in that it prepared and submitted shop drawings, and certain materials were fabricated and picked up by Fermar in February 2015 for the site. Furthermore, Zenith’s temporary shoring system was left in place on site during the winter shut down period and Zenith’s concrete forms installed before the winter shut down were used by Fermar to pour concrete after the winter shut down.

As a result of a dispute over delays and payment, Zenith issued a notice of termination of subcontract on February 6, 2015, and registered a construction lien on March 18, 2015.

Fermar contest the timeliness of registration of the lien, on the basis that the last day of work on the site was December 19, 2015, and, as such, Zenith registered its lien outside the 45 day lien period.

Mr. Justice DiTomaso rejected Fermar’s position and held that Zenith’s lien was registered within 45 days of “the date on which the person last supplied services or materials to the improvement”.  In particular, Mr. Justice DiTomaso accepted Zenith’s contention that:

…Fermar’s submission regarding the timeliness of Toronto Zenith’s lien makes no practical or commercial sense.  It would require parties to register claims for liens within 45 days of the date of their last supply of material or labour whenever a construction project was shut down for a significant period of time (whether it by weather, stop work order, scheduling issues or coordination requirements) even though the contractor, subcontractor or material supplier knew that there was ongoing progressive work or substantial quantities of material to be supplied or delivered as required at a later date.

His Honour ultimately concluded that Zenith’s lien had not expired, and was for a lienable supply of services and materials, given that the subcontract contemplated scheduled winter shutdowns, and the extent of offsite activity being performed during the winter shutdown for the Project.

The practical effect of this decision is that a contractor’s lien rights will be kept alive during a scheduled shut down that is longer than 45 days if the contractor continues to perform off site services for the Project during that shut down.  The more interesting question is what will the Court say about a contractor’s lien rights if the nature of the Project is that no off site work is required during the scheduled shut down.

On October 6, 2016, Angelo D’Ascanio will be co-chairing, and Kyle MacLean will be be speaking at, a joint Ontario Bar Association and Middlesex Law Association continuing professional development program titled “What’s Trending in Commercial Litigation?”.  Kyle will be reviewing potential changes to the Construction Lien Act as a result of Ontario’s recently published expert review report.

For more details see the program agenda on the Middlesex Law Association’s website.

 

Aon Risk Solutions Construction Lien Act Review Process

Aon, in partnership with the London and District Construction Association (LDCA), was pleased to sponsor a breakfast meeting for its construction clients and LDCA members on November 25, 2015. This meeting was held to discuss Ontario’s Construction Lien Act review process that is currently underway.

The informative and lively session was facilitated by a panel of leading construction law lawyers, including Geza Banfai of McMillan LLP, Brendan Bowles of Glaholt LLP, and Marcia Oliver of Advocates LLP. All panel members are certified by the Law Society of Upper Canada as specialists in construction law and recognized by Best Lawyers Canada and Lexpert as leaders in the area of construction law. Aon is grateful to Geza, Brendan, and Marcia for donating their time and expertise.

Those in attendance echoed the construction industry’s frequently voiced concerns; in particular, how the construction industry is significantly impacted by the late/non-payment of accounts and how the window in which to exercise lien rights is too short. In conclusion, Aon heard that the Construction Lien Act is no longer responsive to the industry’s needs and the Construction Lien Act review is long overdue.

First introduced in 1983, and having not been amended in any material way since that time, the Construction Lien Act (Ontario), is desperately in need of an overhaul. In February 2015, in response to the construction industry’s increasing concerns, including significant pressure from some sectors for the introduction of prompt payment legislation, the Ontario Government commissioned a review of the Construction Lien Act. Since that time, the review, led by lawyer Bruce Reynolds of Borden Ladner Gervais LLP, has been receiving submissions and meeting with stakeholders. In addition, Mr. Reynolds has been in consultation with an expert advisory group, who provide subject-matter expertise in respect to legal issues. On March 31, 2016, Mr. Reynolds is expected to deliver a comprehensive report on the review process along with his legal opinion. It is expected that the report will be made public very soon after it has been submitted to the attorney general and minister of economic development, employment, and infrastructure. The construction industry is anxiously waiting for the results from this report.

Further information regarding the Construction Lien Act review can be found on the following website: http://www.constructionlienactreview.com.

The decision of the Ontario Superior Court in Robert Nicholson Construction Co. v. Edgecon Construction Inc. underscores the importance of ensuring that payments by owners and contractors to their subcontractors or suppliers are made in compliance with the trust provisions of the Construction Lien Act. Payments made to a third party outside of the construction “pyramid”, even when done in good faith and at the request of the intended recipients, can leave owners and contractors (and their directors/officers) liable for an unintended breach of the CLA trust provisions.

Background

The defendant Owners were developers of a retirement residence in Stratford, Ontario (the “Project”). The Owners entered into a construction agreement for the Project with a company called Edgecon Contracting Corp. (“Contracting”). E. Contracting entered into various subcontracts including subcontracts with two entities: Edgecon Construction Inc. (“Construction”) and a numbered company, 1809313 Ontario Inc. (“180″). The Owners dealt with both E. Construction and E. Contracting as their General Contractor for the Project.

E. Construction entered into a subcontract with the plaintiff, Nicholson. Unknown to Nicholson, the principal of E. Construction, Mr. Enzo Mizzi, also operated E. Contracting (the contracting party with the Owners) and 180.

During completion of the Project, the Owners and the General Contractor agreed, at Mr. Mizzi’s request, to pay an advance of approximately $1.8 million to 180, which had no contractual involvement in the Project. The amount paid to 180 included monies owing to Nicholson which went unpaid after Nicholson’s subcontract work was complete. 180 made payments to subcontractors to the Project but not to Nicholson.

Nicholson sued E. Construction and the Owners. Nicholson then moved for summary judgment against the Owners for breach of the trust provisions of the CLA.

Decision of the Ontario Superior Court of Justice

Nicholson argued that the Owners’ payments to 180 did not discharge the Owners’ statutory trust obligations under the CLA.

The Owners denied liability on the basis that they had paid all certified amounts to their contractual General Contractor, E. Contracting. The Owners also argued that the CLA creates separate trust relationships between: owner and contractor; contractor and subcontractor; and subcontractor and its subcontracts/suppliers. The Owners asserted that, as a result of Nicholson’s position in the construction “pyramid” as a sub-subcontactor, it had no legal standing to enforce the Owners’ trust obligations owed E. Contracting.

A significant component of the CLA is the creation of a statutory trust scheme. Owners, contractors and subcontractors are deemed to be trustees for all monies owing to other parties lower in the construction chain or pyramid. As the motions judge noted, an owner, as trustee for funds owing to the contractual general contractor, can discharge its trust obligations by complying with s. 10 of the CLA:

Once an owner pays the contractor all amounts certified by a payment certifier (less statutory holdbacks), the owner is absolved from any further liability in this regard. The wording of s. 10 makes this perfectly clear. It provides that (subject to holdbacks) once a payment is made by a trustee (here the Owner) to a person who has supplied services or materials to the improvement of a property (here the Contractor), such payment discharges the trust of the trustee (Owner). Importantly, the section then adds such discharge is as against “all beneficiaries of the trust to the extent of the payment made by the trustee”.

In rejecting the Owners’ arguments, the motions judge found that the use of the word “beneficiaries” in the CLA trust provisions was determinative:

[beneficiaries] denotes an intent by the legislature to say, in effect, “if you as a trustee (whether owner, contractor or subcontractor) make a payment to the party to whom you are in privity of contract, you are exempt from liability with respect to all other parties lower down the construction chain with whom you have no privity of contract.

The motions judge held that by agreeing to Mr. Mizzi’s request to pay 180 the funds properly payable to the contractual General Contractor, E. Contracting, the Owners had failed to make payment to a deemed beneficiary of the construction trust funds and in accordance with the trust provisions of the CLA.

The motions judge considered the underlying intention of the Owners in making the payment to 180 but concluded that intention was irrelevant for determining compliance with the CLA trust provisions:

While the Owners’ intentions may have been bona fides, made in good faith and even done in the expectation or intention of subcontractors getting paid sooner, such payment was made at their peril, and, most importantly, legally outside the scope and protection of the CLA.

The motions judge found that the Owners had breached their statutory trust obligations under the CLA and granted summary judgment in favour of Nicholson for its unpaid subcontract balance.

Discussion

There are several useful lessons to be learned from this decision. Of note, this decision confirms that the underlying intent for an extra-contractual payment is irrelevant for determining whether a party has discharged its CLA trust obligations. As the motions judge noted:

What may be a legitimate, bona fide business reason for an owner to make an extra-contractual payment in one situation might be an act done to perpetrate a fraud or otherwise avoid the enforceability of a construction agreement in another.

All paying parties in the construction “pyramid” must take precautions to ensure that payments are made to parties with whom they have a direct contractual relationship. Payments to non-contractual parties, even where such payments are requested by the downstream contractual parties to facilitate payments, should be avoided unless proper precautions can be taken to ensure a complete discharge of the payor’s CLA trust obligations.

Ensuring a complete discharge of trust obligations is required to avoid obligations by a paying party to all downstream parties in the construction pyramid. This decision confirms that an owner or general contractor will be liable to a subcontractor, sub-subcontractor (or any other downstream party) if payments are not made in strict compliance with the CLA trust provisions.