Signing Contract With Non-Existent Party Proves Costly

The specific party named in a construction contract is an important detail that is too-often overlooked.

Alberta’s Court of Appeal recently released a decision (Canbar West Projects Ltd. v. Sureshot Sandblasting & Painting Ltd.) in a dispute over the validity of a lien. The basis for the dispute was that the lien claimant (Canbar) was not the company named in the construction contract, which was “Can-West”. Can-West did not exist.

Canbar had entered into the contract with the owner, Sureshot, prior to incorporating. It intended to incorporate under the name “Can-West” but upon attending the corporate registry, discovered that the name “Can-West” was not available. The name “Canbar” was registered instead.

Canbar applied to the Court of King's Bench when it was unpaid by Sureshot. But the Court held that Canbar's lien was invalid, reasoning that “Can-West” was not a “person” under the Builders’ Lien Act (i.e. Can-West did not exist) and therefore could not register a valid lien. Canbar appealed.

In overturning the Court of King's Bench decision, the Court of Appeal relied on a well-established principle that the courts are required to implement a “strict interpretation in determining whether a lien claimant is entitled to a lien, and a liberal approach with respect to those to whom the statute applies.”

The Court of Appeal held that Canbar could register a lien even though it was not the party named in the contract. “So long as the owner requested the work anyone who provides materials or services in doing that work is a potential lien claimant . . . Nothing in the Builders’ Lien Act requires that the owner have direct dealings with the party who did the work.” The evidence proved that Sureshot requested the work and materials that formed the basis of the lien at issue.

The Court also examined the Business Corporations Act, which permits a corporation to make a contract before it comes into existence provided it adopts the contract after it is incorporated In light of this legislation, the Court of Appeal concluded that the contract in this case, although it named "Can-West", was later adopted by "Canbar". As such, Canbar “became entitled to the benefits of the contract as if it had been in existence and a party to it as of the date of the contract.”

The Canbar case provides one example of many issues that can arise when a contract is made without due consideration to the proper legal (corporate) names of the contracting parties. Although Canbar was ultimately successful in maintaining a valid builders’ lien, it was forced to go to the Court of Appeal – at great expense – to do so.

Unfortunately, we see too-often that construction contracts – particularly purchase orders and similar short-form contract documents – do not properly describe the corporate parties. Enforcing contract rights can be delayed or frustrated if either contracting party is improperly described.

Similarly, we have seen many instances of negotiating with one party only to find out that another corporation (perhaps with a very similar name) is named in the contract documents. It is usually unfortunate to find out, after a dispute occurs, that the other contracting party is not who you thought it was – especially when it turns out the corporation named in the contract has no assets.