The Alberta Court of Appeal has recently decided an interesting issue relating to the right of a supplier to a subcontractor to enforce payment against the general contractor. The supplier alleged that the contractor had promised to pay it in exchange for the supplier’s agreement not to register a construction or builder’s lien. In Sherwood Steel Ltd. v. Odyssey Construction Inc., the Court of Appeal held that such a claim is enforceable and is not barred by res judicata, merger or abuse of process.

Background

Sherwood was a supplier to the subcontractor, Edmonton Concrete. It obtained judgement against Edmonton Concrete and was not paid. Sherwood then sued the contractor, Odyssey, alleging that Odyssey had promised to pay Sherwood if Sherwood did not register a builder’s lien. Odyssey moved for summary judgment on the basis that any such claim was barred by the fact that Sherwood had already obtained judgment against Edmonton Concrete and that its cause of action “merged” in that judgment and could no longer be asserted. The motion judgment agreed and dismissed the action.

Alberta Court of Appeal’s decision

The Alberta Court of Appeal allowed the appeal on three grounds.

First, since Odyssey was not a party to the first action against Edmonton Concrete, and was not privy to Edmonton Concrete, the basic principles of res judicata did not apply.

Second, the claim by Sherwood against Odyssey was not based on the same cause of action. Sherwood’s claim against Edmonton Concrete was based upon a contract between that company and Sherwood. Sherwood’s claim against Odyssey was based upon an entirely different contract between Odyssey and Sherwood.

Third, Sherwood’s claim was not barred as an abuse of process.   Odyssey argued that Sherwood’s claim against it would lead to double recovery. The Court of Appeal said that this would depend upon the proper interpretation of the contract between Sherwood and Odyssey. If the contract was to pay the indebtedness only to the extent that Edmonton Concrete did not pay, then no double recovery would arise.

The Court of Appeal held that, even if Sherwood’s claim against Odyssey was a separate cause of action not affected by recovery against Edmonton Concrete, this would not support the dismissal of Sherwood’s claim as an abuse of process. It said:

“It is not the law that parties are precluded from obtaining two separate judgments for the same loss. For example, the general rule is that there is no bar to a creditor bringing separate actions against both the debtor and guarantors….This is a particularly apt analogy here, given Edmonton Concrete’s financial difficulties which left Sherwood Steel looking to file a builder’s lien against title to the project lands. Just as it is no abuse of process for a creditor to obtain judgment on the debt and then sue on the guarantee, it is no abuse of process for Sherwood Steel to obtain judgment against Edmonton Concrete and then, not having received satisfaction, sue Odyssey on its alleged promise to pay. While their obligations may (again, depending on the interpretation of the contract between Sherwood Steel and Odyssey) be co-extensive, they are each separate and distinct, and as such may be asserted in different actions.”

The Court of Appeal also held that the fact that the damages were identical in each claim was not a bar to the second action. It said that “Our civil procedure permits multiple suits for the same damage” and continued:

“Contractors, architects and engineers who caused the same damage through separate breaches of separate contracts can be sued separately. Owners of motor vehicles can be sued separately from the operator for the same damage. Where all potential defendants are known from the outset (which would not have been the case on the facts alleged here, since Odyssey’s breach is said to have occurred only after Sherwood Steel obtained judgment against Edmonton Concrete), separate actions for the same loss are obviously an inefficient use of litigants’ and court resources. But that can be addressed under rule 3.72 of the Rules of Court (“Consolidation or Separation of Claims and Actions”). The point is that the mere fact of multiple potential judgments for the same loss does not denote an abuse of process, or even a potential abuse of process.”

The Court of Appeal went on to hold that the trial court had ample procedural mechanism to avoid double recovery, in particular by crafting the final judgment to ensure that that did not occur. However, it warned against the court being too cautious about fully awarding judgments to Sherwood. Rather, double recovery could be dealt with during the judgment enforcement process or by the judgment debtors dealing with the problem between themselves:

“I see no impediment in contract law to dividing liability between two parties who have breached two different contracts, causing the same damages to a plaintiff. Indeed, those avenues of recourse for Odyssey make it preferable that a specific, unconditional judgment for the full amount of the award be stated on the order. In other words, civil enforcement, whether by way of contribution between judgment debtors or set-off as between a judgment debtor and its judgment creditor, is a better route for avoiding over-compensation than adding contingent language to an order.”

Discussion

Lawsuits arising from construction projects can be numerous and complicated. They may run into various rules or doctrines designed to avoid multiplicity of proceedings. But ultimately the court must look through the whole process and do what’s fair and not allow the doctrines to get in the way.

When suppliers and subcontractors are unpaid, then there must be very good reason before court procedural rules bar their claims. In this case, the Alberta Court of Appeal was not prepared to allow those rules to stand in the way of a trial of the merits of the claim.

Interestingly, the Court of Appeal had no concern about Sherwood giving up its claim for a builder’s lien in entering into the contract with the contractor. The supplier agreed not to exercise a statutory right, and one which was against the owner. Yet, the court considered that agreement to be good consideration for the contract with the contractor. That result seems appropriate since the filing of a lien would likely have had a negative effect on the contractor in the form of additional holdbacks by the owner.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16

Sherwood Steel Ltd. v. Odyssey Construction Inc., 2014 CarswellAlta 1750, 2014 ABCA 320

Construction and Builder’s liens  –  Merger  –  Res judicata  –  Abuse of process

Thomas G. Heintzman O.C., Q.C., FCIArb                                               February 18, 2015

www.heintzmanadr.com

www.constructionlawcanada.com