1996 S.H. No. 132494 IN THE SUPREME COURT OF NOVA SCOTIA BETWEEN: HAZMASTERS ENVIRONMENTAL EQUIPMENT INC., body corporate, and LONDON GUARANTEE, body corporate Defendant 1996 S.H. No. 140468 IN THE SUPREME COURT OF NOVA SCOTIA BETWEEN: HAZMASTERS ENVIRONMENTAL EQUIPMENT INC., body corporate, and­ RIDEAU CONSTRUCTION INC., body corporate, DECISION HEARD: Before the Honourable Justice H.S. Nathanson on December 15, 1997, at Halifax, Nova Scotia DECISION: December 30, 1997 COUNSEL: Erroll G. Treslan, Esq., counsel for the plaintiff John Kulik, Esq., counsel for the defendants NATHANSON, J. After a sub-contractor failed to complete its contract work, a supplier of materials to the sub-contractor sued the general contractor and the surety under the terms of a Labour and Material Payment Bond for payment of a balance owing to it by the sub-contractor. The Bond contains provision limiting the liability of the surety and the principal to make payment to any claimant not having contract directly with the principal. ISSUES The parties request the Court to adjudicate two issues, as follows: 1. Does the supplier of materials to the sub-contractor have any cause of action against the general contractor? 2. Is the supplier of materials to the sub-contractor entitled to recover against the surety under the Bond? FACTS On or about June 6, 1995, Rideau Construction entered into contract with Her Majesty the Queen in Right of Canada for the installation of an air conditioning system at the Air Terminal Building, Halifax International Airport, Elmsdale, Nova Scotia. As condition of the contract, Rideau Construction was required to provide Labour and Materials Payment Bond. London Guarantee issued Bond No. 113814 in which Rideau Construction, the general contractor, was named as principal, and London Guarantee was named as surety. The Bond includes provision limiting the liability of the surety and the principal, as follows: (4) For the purpose of this Bond the liability of the Surety and the Principal to make payment to any claimant not having contract directly with the Principal shall be limited to that amount which the Principal would have been obliged to such claimant had the provisions of the applicable provincial or territorial legislation on lien or privileges been applicable to the work. (emphasis added) Rideau Construction arranged with All Ports Insulation and Asbestos Services Inc. to supply labour and materials for the contract work. Although Rideau Construction sent form of subcontract to All Ports, no formal sub-contract document was ever executed. The value of the sub-contract, inclusive of change orders, was $648,547.19. Between December 4, 1995, and March 11, 1996, Hazmasters supplied materials to All Ports in relation to the subcontract. As of the latter date, there remained owing by All Ports to Hazmasters the sum of $18,174.44. This sum is still unpaid. Prior to May 31, 1996, Rideau Construction approved progress claims and extras from All Ports having total value of $277,665.07, from which holdback of $27,766.50 was retained. In July, All Ports defaulted under the terms of the subcontract by failing to complete its work and abandoning the job site. At the time (and shortly thereafter), All Ports submitted the following progress claims to Rideau: May 31, 1996 35,921.83 July 10, 1996 4,912.16 July 11, 1996 1,388.48 July 12, 1996 2,983.59 TOTAL: 45,206.06 On July 5, Hazmasters submitted claim for payment under the terms of the Bond in the amount of $18,174.44. It also notified Rideau Construction of its intention to claim under the Bond. On or about July 16, London Guarantee requested particulars of Hazmasters' claim. On July 17, Jim Brennan, who apparently was Operations Manager of Rideau Construction faxed to Brian Strawn, of Hazmasters, the following handwritten memo: Brian: Further to our conversation earlier today, Rideau Construction Inc. will issue payment direct to Hazmasters in the amount of $18,174.44 from Allports account. We will require complete .backup of these charges and upon receipt of that we will issue cheque. Jim On the same date, Hazmasters provided Rideau Construction with full particulars of its claim. It says that it relied upon the assurance of Rideau Construction that its claim would be paid, and therefore did not immediately provide particulars of its claim to London Guarantee. On or about July 26, Rideau Construction was served by Revenue Canada with Requirement to Pay up to $136,446.89 on account of All Ports' liability under subsection 227(10.1) of the Income Tax Act. On or about August 2, Rideau Construction received demand from the Director of Labour Standards for Nova Scotia requiring Rideau Construction to pay to the Province of Nova Scotia any amount it owed to All Ports up to maximum of $12,000. Rideau Construction arranged for the completion of the All Ports sub-contract. Both parties agree that the amount of the theoretical mechanics' lien fund which would have been available to subcontractors of All Ports (such as Hazmasters) if the Mechanics' Lien Act, R.S.N.S. 1989, c. 277 had applied to the project, would have been less than the amount of the demands made by Revenue Canada and Labour Standards as against Rideau Construction. The mechanics' lien fund would have consisted of the greater of: (a) any amount owed by Rideau Construction to All Ports; or (b) the holdback fund (being 10 of the value of the work completed by All Ports at the time All Ports abandoned its work under the subcontract). On or about August 19, Hazmasters provided particulars of its claim to London Guarantee. On August 21, Rideau Construction requested Public Works Government Services Canada for permission to pay directly to suppliers and labourers for All Ports any funds that remained after All Ports' contract work was completed. On the same date, Rideau Construction wrote to both Revenue Canada and the Labour Standards Tribunal advising that there was no money payable to All Ports as of that date. On September 10, counsel for London Guarantee wrote to counsel for Hazmasters stating that, at that time, there was no money owing by Rideau Construction to All Ports. While it is common ground that Hazmasters comes within the definition of "claimant" set out in the Bond, this letter, in effect, denies liability based on the limitation of liability set out in clause (4) of the Bond. Issue No. 1: Does the supplier of materials to the sub-contractor have any cause of action against the general contractor? It is common ground that there was no formal, written contract in existence between Rideau Construction and Hazmasters for the supply of materials and services. However, it is submitted on behalf of Hazmasters that the memo faxed by Rideau Construction to Hazmasters on July 17, 1996, contained binding promise to pay and, therefore, constituted contract. However, I find no intention to contract, no valuable consideration, and no promise to pay. The informality of the handwritten memo, from Jim to Brian, containing no words of explicit promise, belie an intention to bind commercial corporation such as Rideau Construction. There is no indication of something of value passing from Hazmasters to Rideau Construction at the same time; Hazmasters submitted that Rideau Construction benefitted by the claim not being brought to the attention of London Guarantee and by the fact that Rideau Construction acquired the opportunity of seeing Hazmasters' prices, but there is nothing in evidence to establish that these were of benefit to Rideau Construction and, in any event, such alleged benefits did not coincide with the sending of the faxed memo. There was no valuable consideration. Finally, Rideau Construction's statement that it would pay "from Allports account" is not promise to pay, but is merely statement or condition that any payment made would be paid out of any money which remained owing by Rideau Construction to All Ports after the contract work was completed. Hazmasters also submitted that the fact that it desisted from immediately pusuing its rights under the Bond constituted sufficient consideration to support Rideau Construction's alleged promise to pay. detriment can be good consideration for contract, but not where reliance to one's detriment was not sought, and not where there there was no promise that was capable of being relied upon so that, therefore, any alleged reliance to one's detriment was unreasonable. There was no contract. In the absence of contract, Hazmasters, the supplier of materials to All Ports, does not have cause of action against Rideau Construction, the general contractor. Issue No. 2: Is the supplier of materials to the sub-contractor entitled to recover against the surety under the Bond? Paragraph 4 of the Labour & Material Payment Bond limits the liability of the surety and the principal to make payment to a claimant such as Hazmasters not having a contract directly with the principal. Liability is limited to the amount which the Principal would have been obliged to pay to the claimant if the provisions of the Mechanics\' Lien Act, R.S.N.S. 1989, c.277, applied to the work. The work referred to in paragraph 4 of the Bond is that which is the subject matter of the contract between the Crown and Rideau Construction. By virtue of s.14 of the Interpretation Act, R.S.N.S. 1989, c.235, no enactment is binding on the Crown unless it expressly states that the Crown is bound. The Mechanics\' Lien Act does not expressly state that it binds the Crown. Therefore, the Act does not apply to this contract or this work. In this regard, see Canadian National Railway Co. v. Corrosion Services Co. et al (1991), 1991 CanLII 8220 (NS CA), 81 D.L.R. (4th) 158 (N.S.S.C.A.D.). Therefore, the issue resolves itself into this question: If the Mechanics' Lien Act did apply, what amount would Rideau Construction be obliged to pay to Hazmasters? Section 12 of that Act establishes that the maximum amount claimable by person other than the contractor is the amount owing to the contractor. Section 13(2) establishes the requirement of holdback of 10% of the value of the work, services and materials actually done, placed or furnished. Thus, the maximum amount of the lien fund available to subcontractors is the greater of the amount owing by the contractor to its subcontractor or the 10% holdback. It is submitted on behalf of the defendants that section 5.5(b) of the subcontract between Rideau Construction and All Ports provides that, if All Ports abandons its contract work, Rideau Construction may withhold payments until the subcontract is finished and that would necessarily include determination of the cost of completion. That submission is not accepted because this sub-contract was never executed. If the Mechanics' Lien Act applied, the amount available to all subcontractors of All Ports would have been 10% of the value of the work performed by All Ports to the date of abandonment. In an action by subcontractor under the Act, Rideau Construction would not be permitted to set off its claim against All Ports from this amount. That amount must be available for the subcontractors of All Ports unless some other party had prior claim to the holdback fund. Dias v. MacLean (1993), 10 C.L.R. (2d) 178 (N.S.S.C.) is authority for the proposition that third party claims from Revenue Canada take priority over claims of mechanics' lien claimants to holdback. Therefore, if the Mechanics' Lien Act applied in this case, the third party claims from Revenue Canada and the Province of Nova Scotia would take priority over the claims of the subcontractors of All Ports. Since those third party claims total an amount greater than the amount of the holdback, potential lien claimants such as Hazmasters would not be entitled to recover any amount from Rideau Construction. The only authority cited with respect to the purpose and effect of Clause (4) of the Bond is Johnson Controls Ltd. et al v. Dineen Construction (Atlantic) Inc. et al (1996), 1996 CanLII 10616 (NS SC), 157 N.S.R. (2d) 350 (S.C.) which considered provision of Bond identical to that in the present case. Davison, J. held that there was no priority in the particular circumstances and, therefore, subcontractors were entitled to have their claims paid. However, he considered the issue of priorities before determining if payment must be made under the Bond, and clearly found that the issue of priorities was not irrelevant but must be carefully considered. The purpose of paragraph of the Bond is to put subcontractors in the same position they would have been in if the Mechanics' Lien Act had been applicable. However, Hazmasters wants to be put in better position in that it seeks to recover under the Bond even though it would not have been able to recover had the Act applied. It is submitted on behalf of Hazmasters that the statutory liens should not be taken into consideration in considering what amount the principal would have been obliged to pay if the provisions of the Mechanics' Lien Act had been applicable. If the statutory liens were omitted from consideration, as they should be because they are not explicitly mentioned in paragraph of the Bond, there would be more than enough money available to pay Hazmasters' claim. Counsel for Hazmasters had not cited any authority for this submission. It is further submitted on behalf of Hazmasters that the position of London Guarantee is based upon three assumptions, each of which is disputed. First, it assumes that calculation of the theoretical mechanics' lien liability must include consideration of potential liabilities of the principal to third parties falling outside the definition of "claimant" under the Bond. Counsel for London Guarantee says that Rideau Construction was entitled to offset the cost of completion against the holdback and any excess over the holdback being held and, in this regard, cites Macklem and Bristow, Construction Builders' and Mechanics' Liens in Canada (6th edition) Vol. 1, p.4-14, and the many decided cases cited there. Second, it assumes that calculation of the theoretical mechanics' lien liability must be made after Rideau's receipt of the statutory liens; however, the Bond is silent as to what date the obligation to pay is to be calculated. Counsel for London Guarantee says that surety must have sufficient time to investigate claim, ascertain whether there are other claimants and the amounts of their claims, and decide what amount it should pay into court; until then, it cannot pay particular claim. Third, it assumes that the existence of statutory liens can be used to afford an exclusion under the Bond even where the statutory liens have not been satisfied; here, London Guarantee is relying on the statutory liens to avoid paying under the Bond while, at the same time, resists paying the statutory liens on the basis that there is no money owing to All Ports until such time as it completed the All Ports' subcontract. Hazmasters relies on the authority of ICI Paints Inc. v. Canadian Surety Co. (1992), 1992 CanLII 2518 (NS CA), 116 N.S.R. (2d) 385 (S.C.A.D.) as support for the general proposition that recovery under Payment Bond should be allowed where the terms of the Bond are unambiguous and reasonably unstrained interpretation will permit such recovery. Counsel for London Guarantee says that, if the Act applied, Rideau Construction would be required to retain the holdback established by that Act: Construction Builders' and Mechanics' Liens in Canada, supra, Vol. 2, pp.4-13. Finally, the case of ICI Paints Inc. v. Canadian Surety Co. deals with different fact situation and the interpretation of different wording and, as such, it has no application to the present case. accept the submissions on behalf of London Guarantee. In the result, if the Mechanics\' Lien Act had been applicable, Hazmasters would not have been entitled to recover anything due to the third party statutory liens. DISPOSITION The claims of Hazmasters against Rideau Construction and London Guarantee are both dismissed. Ordinarily, costs follow the event. However, it is submitted on behalf of Hazmasters that this case raises novel point for which there is no authority and, therefore, costs ought not be awarded against it. This submission is not accepted. There is sufficient authority to enable reasonable opinion as to the probable outcome of Hazmasters' claims. Portions of its submissions appeared to be strained. Also, counsel for Hazmasters failed to agree upon the inclusion in an Agreed Statement of Facts of two facts with respect to which, in cross-examination, the only witness called on behalf of Hazmasters acknowledged he had no evidence in contradiction. Therefore, Hazmasters will pay the costs of Rideau Construction and London Guarantee which, because they are represented by the same counsel, will be single amount as may be agreed upon between counsel or, if agreement is not possible, will be set by the Court at the time an Order for Judgment is taken out. J. Halifax, N.S.
After a sub-contractor failed to complete its contract work, the plaintiff, a supplier of materials to the sub-contractor sued the general contractor and the surety under the terms of a labour and Material Payment Bond for payment of a balance owing to it by the sub-contractor. The Bond contained a provision limiting the liability of the surety and the principal to make payment to any claimant not having a contract directly with the principal. Dismissing the action with costs, that there was no evidence of intention to contract, valuable consideration, or binding promise to pay between the general contractor and the supplier. With respect to the principal, as the Bond limits the liability of the surety and principal to make payment to a claimant such as the plaintiff not having a contract directly with the principal, liability is limited by the Bond to the amount which the principal would have been obliged to pay to the plaintiff if the provisions of the Mechanics' Lien Act applied to the work. As the contract was with the Crown, and the Act is not binding on the Crown, the general contractor was not obliged to pay anything to the plaintiff. Therefore, the supplier was not entitled to recover against the surety under the Bond.