The Public Works Act (“PWA”) is a helpful, rarely litigated piece of legislation for unpaid subcontractors. By submitting a PWA claim to the Provincial Government, a subcontractor has the ability to seek compensation outside of its contractual rights from the party it contracted with on public projects that otherwise may not be lienable. This is particularly useful in a scenario where one party in the contractual chain becomes insolvent, leaving unpaid sub-subcontractors behind.
Public Works Act claims are Priority Claims in Bankruptcy Proceedings
Whether PWA claims are considered priority claims in the event of a bankruptcy proposal was recently considered by the Court in Graham Construction and Engineering Inc v Alberta (Minister of Infrastructure), 2019 ABQB 543.
Graham was the general contractor for the construction of the Grande Prairie Hospital. The project was administered by the Provincial Government, via the Minister of Infrastructure, as a public work.
The Province removed Graham from the project in September 2018. Graham estimated that approximately $5.7 M was owed to its subcontractors. More than $60 M in PWA claims were filed shortly thereafter.
The Province paid approximately $30 M into Court in February 2019, as per section 15(4) of the PWA, which allows the Province to pay funds into Court when there is a dispute between the general contractor and a PWA claimant with respect to how much is owed.
Approximately $9 M of the funds in Court were held for the PWA claims of Schendel Mechanical Ltd. (“Schendel”) and its sub-subcontractors. Schendel became insolvent and filed a Division 1 Proposal under the Bankruptcy and Insolvency Act (“BIA”). The Proposal stayed all proceedings against Schendel. Without more, this prevented Schendel’s creditors, including its sub-subcontractor PWA claimants, from receiving payment outside of a Court-approved compromise.
The Court considered whether claims under the PWA had a special priority status akin to builders’ lien claims under the BIA, to allow Schendel and its sub-subcontractors to receive payment despite the stay of proceedings under the BIA.
The Court held that PWA claims, like builders’ lien claims, have a “special or extraordinary status” under the BIA. As a result, Schendel’s unpaid sub-subcontractors were entitled to receive payment for their proven PWA claims from the funds held in Court, notwithstanding Schendel’s insolvency and the stay. The Court noted that both the PWA and the Builders’ Lien Act give protections to unpaid subcontractors. Without a lien or PWA claim, the only recourse is to sue the debtor. Given the similarity between the purpose of the PWA and the Builders’ Lien Act, the Court held that both types of claims should be treated the same in a bankruptcy scenario.
With respect to the automatic stay of proceedings under the BIA, the Court held that even though PWA claimants (such as Schendel and its sub-subcontractors) were not listed as secured creditors in the BIA, they were all secured creditors with rights similar to lienholders against the funds in Court. As a result, the funds in Court flowed directly to the sub-subcontractors and not through Schendel.
The Court lifted the automatic stay to allow funds to be paid out of Court to Schendel and its sub-subcontractors, in the amount of their proven claims. This was done without a formal Order approving the BIA Proposal by Schendel. Despite Schendel’s insolvency, its sub-subcontractors were able to receive full payment for their debt claims and were not required to share pro-rata.
How does this affect you?
If you are a contractor performing work on a project that is, or you believe may be, subject to the Public Works Act and have questions about the process and submitting a claim, contact Anthony Burden, lawyer, with Field Law.