Extra! Extra! How Do Subcontractor Change Orders Affect the Lien Fund? It Depends…

Extra! Extra! How Do Subcontractor Change Orders Affect the Lien Fund? It Depends…

More often than not, contractors and subcontractors perform extra work on construction projects over and above the scope of work contemplated by a fixed price contract. Where a subcontractor performs extra work at a contractor’s request, it will often be to the contractor’s account, absent any work required by a subcontractor to correct deficiencies in its own work. However, determining whether the contractor can charge extra work by a subcontractor to the owner will depend on the facts, and evidence is required as to who asked for the extras and why. Further, how this extra work is dealt with when setting the lien fund can become an issue as between the owner and a contractor. The court dealt with these issues in the recent decision of Justice J.T. Eamon in Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., 2018 ABQB 323.

Provincial Store Fixtures (“PSF”) entered into a stipulated price contract with the owner of the Bow Building project in Calgary (the “PSF Contract” and the “Project”, respectively). PSF subsequently entered into a stipulated price contract with a subcontractor, Architectural Millwork & Door Installations (“AMDI” and the “AMDI Subcontract”, respectively). Disputes arose between the owner and PSF and PSF and AMDI regarding extra work allegedly performed by each of PSF and AMDI for which the contractual process for change orders (“COs”) and change directives (“CDs”) was not followed. In an earlier decision (see 2017 ABQB 390), AMDI was granted judgment for certain parts of its claim, which request for judgment was unopposed (the “AMDI Judgment”). PSF and the owner subsequently sought direction from the court as to whether certain amounts contained in AMDI’s judgment constituted extras to the PSF Contract and how amounts included in the AMDI Judgment were to be accounted for in calculating the lien fund.

PSF argued that anything payable by PSF to AMDI must be added to the PSF Contract price on the basis that “AMDI’s claim only exists through the PSF contract… AMDI does not have a specific contract directly with the owner… and… all amounts payable to the subcontractor must flow through PSF in accordance with the contractual agreement between the owner and PSF” (para.35). PSF further argued that amounts included in AMDI’s judgment that were excluded from the PSF Contract price could not be considered in calculating the lien fund.

First, and not surprisingly, the court held that a factual assessment must be conducted for each AMDI extra in order to determine whether it is an extra to the PSF Contract. Since the PSF Contract and the AMDI Subcontract were both stipulated price contracts, some charges were extras while others were included in the fixed price. The court held that to ascertain who bears the cost of an extra in the absence of COs or CDs, it must be determined who requested the work, why it was requested and under what circumstances. The evidence will show whether an AMDI charge is to PSF’s account, for example correcting defects in PSF-supplied materials, or the owner’s account, for example, work done to correct defects in owner-supplied materials.

The court noted that the AMDI Judgment was a judgment on its merits that found the AMDI charges were extras to the AMDI Subcontract (the “AMDI Extras”), but it did not necessarily follow that the AMDI Extras were extras to the PSF Contract, which conclusion depended on the evidence. The court said PSF had the onus to prove the AMDI Extras were extras to the PSF Contract, and it did not meet its evidentiary burden for certain portions of the AMDI Extras.

The court held that on the evidence, the AMDI Judgment included amounts due by PSF to AMDI and were not proven by PSF to be extras to the PSF Contract. It was found that the AMDI Judgment was a proper charge on the lien fund. The court characterized the lien fund as a holdback of the amounts due under the PSF Contract, which could not be used by PSF to fund its liability to AMDI and inflate the PSF Contract price. Specifically, if an extra as between a contractor and a subcontractor is not chargeable back to the owner, a contractor cannot include these amounts in the lien fund as between the owner and the contractor in order to fund the judgment by the subcontractor as a charge against the lien fund.

Dealing with extra work and calculating lien funds on construction projects can be complex and difficult. If you are an owner, contractor or subcontractor on a construction project and want to know more about proving or disproving extras or calculating the lien fund, contact Field Law to discuss your options.

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