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Statutory Declarations
Mon, 2012-06-04 19:25 — David Mckenzie
On a typical construction project, a general contractor is hired by the owner to build the project. Subcontractors are then hired to complete various portions of the work. These subcontractors may in turn engage sub-subcontractors and suppliers. This type of arrangement is often referred to as the construction pyramid.
The owner has no contracts with subcontractors or suppliers and may have little if any dealing with them. Similarly, the general contractor has no contracts with sub-subcontractors or suppliers. Typically, neither the owner nor the general contractor has any means of determining whether the parties lower down the chain are being paid for their services. Because unpaid parties can mean liens and resulting delays, the construction industry has developed the use of statutory declarations to help payments flow to the base of the construction pyramid.
Statutory declarations are sworn statements that may be required before contractors or subcontractors are paid their progress draws or holdback releases. A statutory declaration will only be required as a condition of payment if the party’s contract contains an express term to that effect. Absent such a term, there is no obligation on any party to provide a statutory declaration before being paid.
Under a typical statutory declaration, the signing party swears or affirms that all of its accounts relating to its contract have been paid in full up to and including the last progress draw. The idea behind the statutory declaration is that it provides an assurance to the party making payment that the funds being paid are in fact reaching those farther down the pyramid. However, a statutory declaration may only be as good as the word of the person swearing it; having completed statutory declarations in hand does not fully guarantee that payment has actually been made to the parties further down the pyramid.
The B.C. Supreme Court decision of Beatty Floors Ltd. v. KTM Development Corp. illustrates the potential consequences of making a false statement in a statutory declaration. In this case, Beatty Floors Ltd. (“Beatty”) was hired by KTM Development Corp. (“KTM”) to supply flooring material to various offices that KTM was working on. The principal of KTM swore two statutory declarations in relation to KTM’s work at these offices that stated that all subcontractors' labour and accounts for materials and equipment relating to the offices had been paid. The statutory declarations sworn by KTM’s principal were false, as Beatty had not yet been paid. As a result of the statutory declarations, KTM received further payments from the owner. None of these further payments ever reached Beatty.
The Court found KTM and its principals liable for breach of trust, as the funds paid to KTM by the owner had been impressed with a trust under BC’s Builders Lien Act. The Court awarded damages to Beatty in the amount of $37,829.88, being the amount owed by KTM to Beatty. The Court went further and awarded additional punitive damages in the amount of $15,000, stating that KTM and its principals “should be punished to deter them and others from swearing false statutory declarations in the future.” The Court made the following comments:
Owners and project managers…rely on statutory declarations from contractors in order to ensure the contractor has discharged its obligations and the subcontractors' labourers and material men on projects have been paid. Valid statutory declarations are critical to the payment process and are of paramount importance to owners and project managers. If statutory declarations cannot be relied on by owners and project managers, the orderly payment process on construction projects will become chaotic.
The Beatty decision is a reminder of the importance of statutory declarations in the construction industry. While the decision reminds us that statutory declaration do not fully guarantee that payments have been made further down the construction pyramid, it also provides a warning to individuals and corporations that the swearing a false statutory declaration can result in significant judicial punishment.
David Mckenzie is a lawyer practicing construction and commercial litigation at Jenkins Marzban Logan LLP in Vancouver. He is called to the bar of British Columbia.
DISCLAIMER: The author does not intend to form a solicitor-client relationship with a reader of this article. This article is for information purposes only. It should not be relied upon for legal advice. If you require legal advice, you should seek counsel authorized to practice law in your jurisdiction.
