Canada: The Construction Legal Hypothec: One Must Have "Taken Part" In The Construction

The Civil Code of Québec [Code] provides special protection to businesses and workers in the construction industry:

The hypothec is created without the need to take any steps, although, under article 2727 of the Code, a notice must be registered to extend its validity beyond the 30 days following the end of the completion of the work. But conditions do remain despite this absence of formalism: not everyone who can be linked to the construction can be entitled to the hypothec.

That is what the Court of Québec stated in 10307220 Canada inc. (Nordikasa) c. 3013774 Canada inc. (Construction Lalonde), 2022 QCCQ 2535.

The Facts

The case consists of applications to cancel the registration of legal hypothecs, under article 2731 of the Code.

The plaintiff, 10307220 Canada inc. [Nordikasa], owns land in the Laurentians. It has developed a concept for the sale and development of small-scale houses, also called mini homes, that it sells "off plan" to customers seeking to have a home built in the region.

As it had no experience in construction, and no qualified employees to perform the work, Nordikasa contracted with 3013774 Canada inc. [Construction Lalonde] for the construction of the houses purchased by its customers.

Following the completion of various works, directly and through various sub-contractors, Construction Lalonde registered two notices of hypothec on the homes on June 25, 2020. Nordikasa and a few customers who, in the meantime, had become the owners of the parcels of land on which the homes had been built, filed actions for the cancelation of the hypothecs.

The Parties' Positions

In support of its application to have the legal hypothec cancelled, Nordikasa and its customers claim that the contract between Nordikasa and Construction Lalonde was only a worksite management agreement. In their view, Construction Lalonde's only role was to act as coordinator on the worksite and notify Nordikasa when the latter was to pay subcontractors and suppliers. The plaintiffs argue that, as a simple worksite manager, was not in the list of stakeholders allowed to benefit from the legal construction hypothec.

Construction Lalonde opposes that it acted as contractor, since its role was to "proceed with the construction, from A to Z, of the two mini homes to be delivered, by directly performing certain works, by hiring the various subcontractors, by supervising the work and delivering, ultimately, a completed building" [para 8; our translation].

As the Court reminds, this distinction between the roles of worksite manager and contractor is at the heart of the debate, since "according to the relevant case law, a simple worksite manager does not qualify as a party allowed to benefit from the legal construction hypothec" [para 27; our translation].

The Decision

The Court held that Construction Lalonde was responsible for the framework, excavation, and interior finishing work. Its foreman was on the premises throughout the construction, so that Construction Lalonde was supervising the work done by subcontractors. The Court could not conclude that the contract between Nordikasa and Construction Lalonde was a simple worksite management agreement, since the latter was acting as a contractor under the Code. The Court also observed that Construction Lalonde had made the payments to the subcontractors and suppliers for the framework and painting, and for the concrete slab.

As the Court concluded, to determine whether Construction Lalonde is one of the parties allowed to benefit from the legal hypothec, we need to observe its activity as the construction took place, and go beyond the way it is referred to by the parties or the title that it is given.

Conclusion

This decision is yet another reminder of the importance of analyzing the actual behaviour of the parties during the execution of the contract to determine the nature of the agreement and the rights that it creates. In the contractor's view, regardless of the title of the contract, it is the actual behaviour of the party during the construction that will determine whether this party is among those who can benefit from the legal hypothec.

The decision also emphasizes the importance for parties in similar positions of selecting the right type of contract. Although the worksite management agreement may have some advantages over a contractor's agreement with respect to cash flow and liability towards subcontractors, the worksite manager may not benefit from the significant leverage of the legal hypothec in case of non-payment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.