In the recent case of Hans Demolition & Excavating Ltd. v Green Oak Development (West 7th Corp), 2021 BCSC 1472 [Hans], the British Columbia Supreme Court found that the owner of a project was liable to a subcontractor in unjust enrichment for failure to pay invoices for services rendered. This is a somewhat novel result, as typically a subcontractor cannot bring a claim of unjust enrichment against an owner in the absence of a contractual relationship. Rather, in remedial pursuits, subcontractors are usually limited as against the head contractor (or general manager, or project manager) with whom they have the subcontracting agreement. This is not a coincidence: the structure is intended to provide the owner with protection from liability by limiting its contractual relationship to that with the head contractor who in turn contracts with each subtrade.
The decision in Hans alerts owners of projects that issuing promises or assurances to subcontractors may create a nexus for an owner’s direct liability for the subcontractors’ accounts. Owners can derive some comfort from the fact that they can likely still rely on a defense of no contractual relationship in the absence of such assurances to, and reliance by, subcontractors.
Background
Green Oak Development (the “Owner”) was developing land it owned in the Kitsilano area of Vancouver (the “Project”). The Owner formed a head contract agreement with Webster Development (“Webster”) for the Project sometime in late 2015. A new head contractor, Kindred Construction, was appointed over a year after the subcontractor, Hans Demolition & Excavation Ltd. (the “Subcontractor”), began work on the Project. By the time of trial, the principal of Webster had disappeared and could not be located.
The 2015 Sub-Trade Agreements with the Subcontractor
Initially, the Owner contracted directly with the Subcontractor in April 2015 for demolition work and the removal of trees and hazardous materials on the Project Site (the “April Contract”). This work was supposed to be completed by May 2015, but was held up because of permit deficiencies on the part of the Owner. As a result, it was not completed until the end of 2015, after Webster had begun acting as the head contractor on the Project.
To make matters more complicated, the Subcontractor’s evidence was that it initially objected to the retention of Webster as the head contractor on the Project given its prior experiences with Webster. The Subcontractor stated they only agreed to do work past the completion of the April Contract on the Owner’s assurances that it would pay the Subcontractor directly.
Despite these misgivings, the Subcontractor eventually signed a sub-trade agreement with Webster on November 25, 2015 for the completion of the unfinished excavation, demolition and hazardous material work which had already been set out in the April Contract. This work was completed, and paid for, without issue. After this time, the Court appears to have found that the Subcontractor no longer had any direct contract with the Owner and was working pursuant to subtrade agreements with Webster.
Work by the Subcontractor in 2016
In 2016, the Subcontractor was asked to undertake additional excavation and shotcrete work for the Project (the “2016 Work”). In line with the general confusion on this Project, no agreement was ever signed between Webster and the Subcontractor, or between the Owner and the Subcontractor, for this further work. Two quotes were submitted by the Subcontractor which had spaces for the “Owner’s” signature. Instead, these quotes were signed by Webster. The Subcontractor went on to perform the 2016 Work. On this basis, it appears the Court considered that the 2016 Work was performed by the Subcontractor pursuant to a subcontract with Webster.
Some ‘over-excavation’ work which had not been included in the original two quotes was also performed by the Subcontractor in 2016. The Subcontractor was instructed by the site superintendent to perform certain excavations which, ultimately, had to be remediated at a cost of $45,000. The site superintendent worked for Webster.
Between the start of 2016 until June 2016, the Subcontractor performed its work on the Project without payment issues. It sent all its invoices via email jointly to Webster and the Owner. Of a total amount of $277,470.17 paid to the Subcontractor in 2016 for the excavation and shotcrete work, $202,520.42 was paid directly by the Owner to the Subcontractor, while only $57,219.75 was paid to the Subcontractor via Webster as the head contractor.
Six invoices from June 2016, however, were not paid at all, totaling $175,076.48 (the “Unpaid Invoices”).
The Termination of the Head Contract
True to the Subcontractor’s predictions, Webster’s work soon proved to be unsatisfactory, and the Owner terminated the head contract on September 1, 2016 due to substantive breaches that were not cured. The Owner hired Kindred Construction (“Kindred”) as the new head contractor for the Project.
The Owner informed the Subcontractor and others via email that they had decided to award the rest of the work on the Project to Kindred.
The Assurances
Whether or not assurances had been made by the Owner to the Subcontractor regarding payment was highly contested by the parties and a key factor in the decision. The Subcontractor’s evidence was that it began contacting the Owner on a weekly basis once it became clear that the June Invoices were not being paid. The Subcontractor testified that the Owner made assurances the invoices would be paid. The Owner’s evidence was that no such assurances were ever made.
The Court’s preferred the Subcontractor’s evidence and held that the Owner had indeed made the assurance. This was due in part to the overall evidence that the Owner had only sometimes relied upon Webster to deal with the subtrades as a head contractor, including arranging payment, whereas at other times the Owner was integrally involved in approving the work to be done by the Subcontractor and paid it directly. The $200,000+ previously paid directly by the Owner to the Subcontractor was clear evidence of this practice. The Court’s decision also turned on the Owner’s own evidence that the Subcontractor was “very sensitive” about payment, and had threatened to walk off the job if not paid, which would have been problematic for the continuation of the Project. Additionally, there was no evidence that the Owner ever paid any amounts to Webster for the purpose of paying the Subcontractor’s Unpaid Invoices.
The Decision
The Subcontractor sought a remedy against the Owner for the Unpaid Invoices both by seeking to enforce upon a Builder’s Lien and through the doctrine of unjust enrichment. The Court that found that the Builder’s Lien was invalid due to a timing defect in filing, so the Court next turned its analysis to the issue of unjust enrichment.
The Supreme Court of Canada set out the legal test for unjust enrichment in the case of Pettkus v. Becker, 1980 CanLii 22 (SCC), [1980] 2 S.C.R. 834 at 848. There are three elements in the test, all of which must be found to exist in order to successfully establish the claim:
1. An enrichment to the defendant;
2. A corresponding deprivation to the plaintiff; and
3. The absence of a juristic reason for the enrichment.
The issue in this claim was whether the Owner’s contractual relationship with Webster constituted a juristic reason for any enrichment the Owner received from the Subcontractor, notwithstanding that the Subcontractor was not paid under its own contract with Webster.
The Court considered the law of unjust enrichment in the context of construction projects such as this. This law suggests that typically, where monies are owed by a head contractor to subcontractors in relation to a construction project, a subcontractor cannot claim unjust enrichment against the owner because there is no contractual relationship. The typical framework of construction contracts, being that the head contractor is the party contracting with each of the owner and the subcontractor, provides the “juristic reason” for denying subcontractor recovery against the owner on the basis of unjust enrichment.
The Court found that this case was different in that the Owner provided assurances to the Subcontractor that it would pay the Subcontractor directly for its work on the project. Notwithstanding the lack of contractual relationship between the parties, the Court found “a business relationship was clearly formed”.
Having assured the Subcontractor that it would pay for its work on the project, the Court found at paragraph 111:
[…] Green Oak is in no position to argue that Webster Development’s head contract with it, or Hans Demolition’s contractual relationship with Webster Development, is a juristic reason which deprives Hans Demolition of the remedy of unjust enrichment. While there was no contractual relationship between Hans Demolition and Green Oak regarding the excavation and shotcrete shoring work on the Project, as a matter of equity and fair dealing, the assurance provided by Green Oak to pay Hans Demolition for its work cannot be ignored.
As such, the Court held there was no reason in law or justice for the Owner to retain the benefit of the Subcontractor’s unpaid work. Their relationship was void of the usual ‘bright line’ demarcation there is in construction cases in the business relationship between the Owner and the Subcontractor.
This case shows that project owners should be careful when communicating with subcontractors or paying them directly. It is possible that that actions such as representations, assurances or direct payments to subcontractors could result in creating business relationships and expectations that may give rise to direct and unintended liability for payment, in the absence of any contract.
