In Alberta, the Prompt Payment and Construction Lien Act (the “Act”), RSA 2000, c P-26.4 safeguards individuals, contractors and suppliers to ensure payment for work completed or materials supplied. Their interests are protected by imposing personal liability on “owners” or, by extension, directors in certain circumstances. The Act also establishes the limits of personal liability on “owners”.
Typically, a director is protected from personal liability as long as their actions are not fraudulent or illegal. Nevertheless, specific situations may arise where a director becomes personally liable. One of those situations is when a lien exists.
A lien is a legal claim that a person has against another’s property as security for a debt or obligation. The holder of the lien can maintain an interest in the property that is liened until the debt or obligation is satisfied. The lien serves as collateral, providing assurance to the creditor that they will be able to recover the debt by selling the property if the debtor fails to fulfill their obligations.
In the construction context, a lien protects individuals, contractors, or suppliers who have worked on a project by ensuring that they receive payment for the services or materials provided. In Alberta, a lien is created as follows, pursuant to Section 6 of the Prompt Payment and Construction Lien Act.
Creation of lien
6(1) Subject to subsection (2), a person who
(a) does or causes to be done any work on or in respect of an improvement, or
(b) furnishes any material to be used in or in respect of an improvement,
for an owner, contractor or subcontractor has, for so much of the price of the work or material as remains due to the person, a lien on the estate or interest of the owner in the land in respect of which the improvement is being made.
A Certificate of Substantial Performance can have significant implications for construction liens. In Alberta, where an individual, contractor, or supplier believes that the work on a project is substantially performed, the contractor may issue and deliver a certificate of substantial performance to the owner pursuant to Section 19 of the Act. The certificate of substantial performance determines two types of lien funds, the major lien fund and the minor lien fund.
- A major lien fund is formed for work done before the certificate of substantial performance is issued.
- A minor lien fund is formed for work done after the certificate is issued. If no certificate is issued, then a minor lien fund does not arise.
The Act provides a mechanism for individuals, contractors and suppliers to create liens and to hold owners of corporations personally liable for amounts in the major and minor lien fund. Section 18 and Section 23 require the owner to retain an amount equal to 10% of the value of the work actually done and materials furnished in the major and minor lien funds respectively.
Under Section 18 of the Act, an owner who is liable on a contract where a lien may arise shall, when making payment on the contract, retain an amount equal to 10% of the value of the work actually done for a period of 60 days from the date of issuance of substantial performance of the contract or the date of the completion of the contract.
According to Section 25 of the Act, an owner is not liable under this Act for more than the total of the major lien fund and the minor lien fund (if a certificate of substantial performance has been issued).
In Chandos Construction Ltd. v. Twin Peaks Construction Ltd. 2016 ABQB 296, 38 Alta LR (6th) 414 (“Chandos”), the Court clarified an owner’s potential liability under the Act in Alberta. Both major and minor liens funds required an owner to hold back 10% of each payment. Under Section 25 of the Act, there was no further claim against the owner’s land or the fund(s) beyond what was in the major lien fund and minor lien fund. This section serves to provide a limit to the liability of the “owner” under the Act. However, an owner may still be found personally liable.
Although the Act does not specifically provide for personal liability, if an “owner” has engaged in fraud or other improper conduct, or where the corporate actor and the individual behind it are alter egos of each other, the corporate veil may be pierced to find the “owner” personally liable. In UBG Builders Inc (Re), 2017 ABQB 401, the Court indicated that they would consider the following factors whether to pierce the corporate veil and find corporate actors, including “owners” under the Act, personally liable:
(a) the shareholder treats itself and the corporation interchangeably;
(b) the corporation is merely intended to deflect monies from their proper usage;
(c) the shareholder intermingles the corporations affairs with its own, such that the shareholder fails to recognize the corporations separate identity;
(d) the shareholder treats the corporation’s property as though it belongs to the shareholders without regard for the interest of those dealing with the corporation.
Imposing Personal Liability on Directors and Piercing the Corporate Veil
If a Court is satisfied that the corporate veil should be pierced, an “owner” may incur personal liability.
In the analogous case of Zerbin v. Vrbanek, 2020 ABQB 797, the Court pierced the corporate veil and held the director of a project management company personally liable for fraud, ordering to discharge any builders’ liens. In this case, the Plaintiffs hired the Defendant project management company to build their two homes. The company’s director acted as the Plaintiffs’ agent for third-party suppliers and handled all their payments, while invoicing the Plaintiffs monthly. The Plaintiffs terminated the contracts alleging that the director dishonestly obtained funds from them by inflating invoices, failing to pay sub-trades in full, and using funds for other unrelated purposes. Based on the finding that the director’s conduct was deceitful and fraudulent, which was a direct cause of the loss and the director exercised complete control of the Defendant company, the Court concluded that this was an appropriate case for both, piercing the corporate veil and finding the director personally liable. The Court stated that finding a director personally liable for fraud was in alignment with the Business Corporations Act, RSA 2000, c B-9, s. 122, because the director who acts in a fraudulent manner, does not act in the best interests of the corporation, and is therefore personally liable for their tortious actions.
The Court of Appeal upheld the decision, and further commented that the analysis on lifting the corporate veil was unnecessary as fraud was proven, leading directly to a finding of personal liability.
This case illustrates that a corporation cannot be used to shield from personal liability, particularly in instances of fraudulent conduct. The contractor must remain honest in all dealings with the clients and subcontractors, as liability can arise from failing to disclose material facts.
In summary, the Prompt Payment and Construction Lien Act, protects individuals, contractors and suppliers by allowing them to create liens to ensure payment for work completed or materials supplied. An “owners” liability is limited to the total of the major lien fund and minor lien fund (where applicable), unless there is a basis to pierce the corporate veil.