Date: October 18, 1996 Docket: C952546 Registry: Vancouver IN THE SUPREME COURT OF BRITISH COLUMBIA BETWEEN: THE WINROC CORPORATION PLAINTIFF AND: COLWOOD CONTRACTING LTD. EMILY CARR COLLEGE OF ART & DESIGN GRANWEST CONSTRUCTORS LTD. THE GUARANTEE COMPANY OF NORTH AMERICA DEFENDANTS REASONS FOR JUDGMENT OF THE HONOURABLE MR. JUSTICE WARREN Counsel for the Plaintiff: Jake Harms Counsel for the Defendant Colwood Contracting Ltd.: E. G. Mark Counsel for the Defendants Emily Carr, Granwest and The Guarantee Company of North America: John Logan Place and Dates of Hearing: Vancouver, B.C. February 6, 1996 and April 17, 1996 IN CHAMBERS The Application [1] Pursuant to Rules 18 and 18A, the plaintiff applies for judgment on the basis of unjust enrichment or, alternatively, breach of trust against the defendants, Emily Carr and Granwest, for the value of materials it supplied to the defendant Colwood and which were used in the construction of a building on property the leasehold interest of which is owned by the defendant Emily Carr. The building is located on Granville Island, which is land owned by the federal government. The defendant Granwest is the general contractor for the construction of the building for Emily Carr. The defendant Colwood was the subcontractor which installed the drywall for the project, using materials supplied to it by the plaintiff. Due to a conflict between Colwood and the general contractor Granwest, Colwood was not paid the sum of $134,713.88 which it claims is owed it under its contract with Granwest. In turn, Colwood was not able to pay the plaintiff but agreed to a consent judgment for the amount owing, $39,755.44 plus costs. The defendant Emily Carr is retaining the sum of $146,000 as a holdback, less a portion I directed could be paid out. [2] When the plaintiff's account was not paid by the defendant Colwood in the fall of 1994, the plaintiff wrote to Emily Carr on September 28, 1994, informing it of the default. Approximately one week later, on October 6, 1994, the plaintiff wrote to the defendants, Emily Carr, Granwest and Guarantee Trust, again advancing the claim and advising of its intention to make a claim on the performance bond. The plaintiff was aware that the architect on the project declared Substantial Completion as of September 14, 1994 and that it was the intention of the defendant Emily Carr to pay out some portion of the contract price to the defendant Granwest on October 22, 1994. Hoping to benefit from that, on September 28, 1994, Winroc sent a letter to Emily Carr setting out the essentials of its claim against Colwood. On October 6, 1994, the plaintiff wrote to both the defendant Emily Carr and Guarantee Trust, again setting out the essentials of its unpaid account with Colwood. The Guarantee Trust wrote back to the plaintiff enquiring inter alia as to the contractual relationship between the plaintiff and Granwest and, of course, the plaintiff replied that there was no contractual relationship. In an exchange between counsel for the plaintiff and the project manager for Granwest dated December 5, 1994, the plaintiff sent a copy of a Direction to Pay signed by Colwood, authorizing Granwest and Emily Carr to pay the sum of $33,020.28 to Winroc. It appears that the defendant Emily Carr paid out in excess of $1,000,000 to Granwest following receipt by Emily Carr and the architect of a Statutory Declaration of the vice- president of Granwest dated October 13, 1994, stating that all accounts for labour, subcontracts, products, .... and other indebtedness which may have been incurred by [Granwest] in the Performance of the Work and for which the Owner might in any way be held responsible have been paid in full except holdback monies properly retained. On October 25, 1994, the architect issued a Certificate of Payment directed to Emily Carr entitling Granwest to payment of $1,162,392.58. None of this money was paid to the plaintiff. Unjust Enrichment [3] The plaintiff argues that there is no issue that it supplied the materials used by the defendant Colwood on the improvement owned by the defendant Emily Carr and that as a result, the defendant Emily Carr has received a benefit amounting to the increased value. As well, the defendant Granwest has been paid for materials it used in the construction. The plaintiff, on the other hand, has been deprived of its materials and has not been compensated and there being no juristic reason for the defendants' enrichment, the money is owed "based on the principles of equity and good conscience". Breach of Trust [4] Alternatively, the plaintiff submits that as a materialman as defined by the Builders Lien Act, the defendant Granwest has breached the trust provisions of the Act when it indicated that all subcontractors had been paid. As a result of this, the defendant Emily Carr paid out to the general contractor but the general contractor has failed to pay the plaintiff as a materialman in breach of the trust provisions of the Act. While the plaintiff acknowledges that portions of the Act have been held not to apply to land owned by the federal crown, nevertheless the plaintiff submits that the trust provisions under the Act create a separate right, independent from those provisions of the Act requiring a holdback and creating a lien right. In other words, the plaintiff argues that the treatment of funds held by a contractor for the benefit of suppliers is separate and distinct from the responsibilities owed by the owner of land: Okanagan Blasting v. Contech Enterprises Ltd. (1983), 50 B.C.L.R. 82; Engineering & Plumbing Supplies Ltd. v. Seaboard Excavating Ltd et al. (1988), 29 B.C.L.R. (2d) 309. [5] Lastly, the plaintiff submits that the defendant Granwest as trustee has failed to properly account for the funds received by it from the defendant Emily Carr as the figures shown in the affidavit of an officer of Granwest differ from the figures set out in its statement of defence: Jacobson and Humphries et al. v. Basile's Developments Ltd. (Unreported, May 24, 1983, Vancouver No. C813621, B.C. County Court). The Defence [6] In a joint submission on behalf of all of the defendants save for Colwood, the defendants argue firstly that the case is not suitable for disposition under either Rule 18 or 18A because of the conflict in the affidavits and because the claims of the plaintiff against these defendants cannot properly be determined until the issues between some of the parties have been determined in two other actions. [7] As to the plaintiff's claims against Emily Carr, it is argued that there is no privity of contract between Emily Carr and the plaintiff. The contract was between Emily Carr and Granwest and any funds would be due not to Colwood but to Granwest. [8] As for a lien claim against the holdback, such a claim is entirely dependent upon the statute and such claims under the provincial legislation are unenforceable against federal lands. Even if the lands were not federal, the Act requires that any lien be filed within 31 days (s. 22) and the plaintiff not having filed within that time period is not entitled to a declaration of lien against Emily Carr. Further, s. 20 of the Act limits liability of an owner to 10% of the value of the work performed by the general contractor but does not require an owner to actually hold that amount back. The wording of s. 20 restricts the operation to "an owner or person primarily liable on any contract under or by virtue of which a lien may arise". As there can be no lien against land owned by the federal crown, there can be no lien against any holdback. [9] As for the claim based upon breach of trust, the defendants argue that it is well settled that monies in the hands of an owner are not the subject of a trust. A trust does not arise until the money is received by the contractor on account of the contract price: A & M Painting Contractors Ltd. v. Byers Construction Western Ltd. (1991), 28 B.C.L.R. 43 (B.C.C.A.) and no trust is created as between the plaintiff and Emily Carr even if the head contract required the general contractor to pay all the sub-trades: W & R Plumbing Ltd. v. The Queen (1986) 17 C.L.R. 291 F.C.C. Trial Div. [10] Emily Carr argues that the claim against it based upon a constructive trust can only be made out if it can be shown that Emily Carr were unjustly enriched. The essential elements of a claim for a constructive trust are an enrichment, a corresponding deprivation and an absence of any juridical reason for the enrichment and that can only be proven if Emily Carr has not paid amounts properly due by it to Granwest and that, of course, must await the trial of the issues between Granwest and Emily Carr. Aside from that issue being another reason for the application not being suitable under Rule 18 or 18A, the plaintiff must also establish "an element of injustice or want of commercial good conscience which should guide the application of the three part test in Pettkus v. Becker [1980], 2 S.C.R. 834, in a commercial context: Cherrington et al. v. Mayhew's Perma-Plants Ltd. (1990), 45 B.C.L.R. (2D) 374 (B.C.C.A.). Granwest Constructors Ltd. [11] The plaintiff delivered a Direction to Pay to Granwest for any money it owed to Colwood. However, Granwest and Colwood are locked in litigation on that claim and Granwest maintains that it has proper back charges against Colwood and that it is entitled to hold back funds for what it says is the value of Colwood's deficiencies. Further, Granwest has a claim against Colwood for delay and Emily Carr in turn has a claim against Granwest for delay which Granwest attributes to Colwood. Finally, Granwest has a potential liability for WCB remittances, which Colwood failed to pay, and those would be a set off against Colwood's claims. [12] Under these circumstances, Granwest argues the plaintiff's application is premature particularly as the contract between Colwood and Granwest contains a clause permitting the general contractor to pay its subs only after it has been paid by the owner. Granwest argues that it has not been paid by Emily Carr for that portion of the work which forms the basis for Colwood's claim and hence there is no obligation to pay Colwood and the plaintiff. [13] As for the claims in constructive trust, Granwest submits that given the vibrant state of the competing claims between Colwood, Emily Carr and Granwest and particularly the claim of Granwest against Emily Carr for over $700,000, it can hardly be determined at this stage that Granwest has been unjustly enriched and that there is an absence of any juridical reason for the enrichment. Decision [14] On the affidavit materials, there does not appear to be any dispute that the plaintiff delivered all of the materials required under its contract with Colwood. Nor does it appear that there is any evidence to even suggest it has been paid or that there is any deficiency on its part. It is caught in the middle of the struggle between the owner, the general contractor and one of the subcontractors and it is without the protection of the Act because the improvement is on land owned by the federal crown. One can only feel sympathy for the plaintiff and admire its ingenious attempts to avoid the pitfalls of the gap in the legislation. [15] There is no privity of contract between the plaintiff and Emily Carr and thus, the Direction to Pay which the plaintiff delivered to Emily Carr is of no effect, other than perhaps to put that defendant on notice that there was a claim by a materialman against one of the subcontractors or the general contractor. The defendant Guaranty Trust was alert to this for in its correspondence with the plaintiff, it asked for particulars of the contract between Granwest and Winroc. [16] Turning now to the claim founded on constructive trust, the plaintiff must establish that Emily Carr and or Granwest have been enriched, with a corresponding deprivation to Winroc and the absence of any juridical reason for the enrichment and deprivation. As well, the plaintiff must establish an element of injustice or a want of commercial good conscience which should guide the application of the three-part test: Pettkus v. Becker (1980) 2 S.C.R. 834; Atlas Cabinets & Furniture et al. v. National Trust et al. (1990) 45 B.C.L.R. (2d) 99. [17] The Atlas decision is an important one where there is a claim founded on constructive trust in a commercial context. At page 109, Lambert J.A. said: The heart of the subcontractors' claim is that a wrong was done to them which improperly enriched National Trust [the bonding company] and that as a result, they are entitled to a remedy for that wrong. The holding back of the unadvanced funds did not constitute the wrong. But urging the subcontractors to complete the work, and causing them to forego their alternative of stopping work, cutting their losses, and exercising their rights to lien the uncompleted project, by giving an assurance to them that the unadvanced funds would be advanced..., is said to have constituted a wrong that is properly categorized as unjust enrichment. The circumstances which give rise to a claim for unjust enrichment have been considered in a number of cases of the Supreme Court of Canada....[including inter alia Pettkus v. Becker, supra]. In the context of a domestic relationship those three circumstances are likely to be simpler to apply than in the context of a commercial relationship where the essence of the relationship is the enrichment of the participants, perhaps at the expense of each other, all in the name of fair and honest business dealing. In a domestic relationship, equality of the parties to the relationship should normally be the standard of fairness. But, in a business relationship, honest dealing, not equal dealing, should set the standard of fairness.... But it is important to understand what is meant by "enrichment", by "deprivation" and by "juristic reason" in the context of a commercial relationship where ordinary and extraordinary flows of funds are part of the reality and purpose of the relationship. To my mind the key to the correct interpretation and application of the decisions of the Supreme Court of Canada on this subject to a commercial relationship is to focus on the "unjust" element of "unjust enrichment". . . . In my opinion the concept of the injustice of the enrichment as being against sound commercial conscience must continue to guide the application of the three tests in Pettkus v. Becker when they are applied to a commercial relationship. The majority of the Court of Appeal concluded in Atlas that the subcontractor had relied upon the assurance of the mortgage lender that the funds would be advanced if it completed the job. The completion which followed the assurance enhanced the defendant's mortgage security and that constituted the unjust enrichment. [18] This decision, though clearly distinguishable on its facts, is authority that the elements of unjust enrichment must be viewed in a commercial context. [19] The defendants rely upon the decision of the Court of Appeal in Lawter Holdings Ltd. v. Panduro Holdings Ltd et al. (1991), 55 B.C.L.R. (2d) 317. In that case a roofing contractor had contracted to roof an apartment but before the job started, the owner sold the building to Panduro. The contract of sale provided that the roofing would be done and permitted the buyer to hold back $50,000 until it was done. Before work began, the plaintiff/roofer was assured by the vendor's employee that there was $50,000 in trust to cover the cost. The work was done and the plaintiff invoiced the vendor but did not file a lien, relying on a letter from the vendor's lawyer that the invoice had been submitted for payment. The vendor became insolvent and the purchaser had substantial claims against the vendor. The plaintiff then sought judgment inter alia on the basis that the defendant/buyer had been unjustly enriched. The Court distinguished Atlas, finding no assurance by an agent of the buyer which induced the plaintiff to perform the work. Although the buyer had been enriched, there was established a juristic reason for the enrichment, namely, the state of accounts between the vendor and the buyer. Hollinrake J.A. referred to the decision of the court in Cherrington v. Mayhew's Perma-Plants Ltd. [1990], 45 B.C.L.R. (2d) 374, finding the two cases were similar if not the same and noting that a juristic reason for any enrichment was a debt owed by a third party to the person said to be unjustly enriched. At para. 13 of the reasons, Hollinrake J.A. said: I should say here that whatever injustice it could be said that [the roofing contractor] has experienced as a result of [the vendor's] insolvency has also been suffered by [the buyer]. [The buyer] is substantially prejudiced by the state of accounts between it and [the vendor] on the sale of the apartment block. The culprit here, and the only one, is [the vendor]. I can see no commercial good conscience in further burdening [the buyer] with an account of [the roofer] when it was [the vendor] with whom [the roofer] contracted to do the roofing. [20] In my view, the facts of this case are on all fours with Ken Lawter Holdings Ltd. The defendants have been enriched by the materials supplied by the plaintiff in the sense that the building was completed although not without some substantial claims for deficiencies and delay. The plaintiff is deprived by the value of the materials it supplied to Colwood but there is a juristic reason for the enrichment. The plaintiff's claim is against Colwood and it has a judgment against it. There is no suggestion in the evidence that there was any inducement from either of the defendants such as happened in Atlas. [21] The plaintiff's claims against all of the defendants save Colwood are dismissed with costs. Should Colwood's claim against the defendant Granwest succeed, then the plaintiff has its judgment against it and may proceed in the usual manner to enforce it. Because all defendants save for Colwood were represented by one counsel at this application, there will be one set of costs for the application. Otherwise, the defendants are entitled to the rest of their costs individually. "T. P. Warren" T. P. Warren, J. Vancouver, British Columbia October 18, 1996