Prevenient Arrangements - Builders' Liens on Oilsands Worksites21-Mar-11
By Ravinder Toor
Normally, lien rights under the Alberta Builders’ Lien Act (the “BLA”) expire unless a lien is registered within 45 days (or 90 days for an “oil or gas well site”) after the last day services or materials are furnished to the property (BLA, section 41). The exception to this is the prevenient arrangement, which is said to exist when there is a preliminary understanding between the parties that they are entering into an ongoing relationship for the supply of services or materials.
When a prevenient arrangement does exist, a contractor or supplier is entitled to lien for the entire value of the contract by registering a lien within 45 days of the last day services or materials are provided, rather than having to file a lien within 45 days of each service that is provided or material that is furnished. In other words, the existence of a prevenient arrangement allows for a lien to be registered for services or materials that would otherwise be out of time if provided under separate contractual arrangements.
The case law has made it clear that the existence of a prevenient arrangement is a fact driven analysis. The courts will generally consider the following factors to determine if there is some degree of certainty in the arrangement between the parties and, hence, a prevenient arrangement¹:
- the arrangement is for a limited time frame;
- the arrangement is for a designated area of service;
- the arrangement guarantees a specific amount of work;
- there is exclusivity in the arrangement; and
- there are advance discussions about the specific requirements in the arrangement.
Issues on Oilsands Worksites
Ongoing arrangements are particularly common in the oil and gas sector, as contractors and suppliers are often required to furnish services and materials to various sites over time. However, not all ongoing arrangements will meet the criteria for a prevenient arrangement, and a number of practical issues could arise which may effect a party’s lien rights and obligations.
An issue that often arises is that contractors and suppliers mistakenly believe that their ongoing relationships automatically allow them to place a lien for the whole continuing arrangement, rather than simply for work and materials that were furnished within the last 45 days. In that regard, the case law clearly indicates that labour or materials that are furnished under separate contracts, or work orders, cannot simply be tacked together so as to extend the time for registering liens, even if they are between the same parties and relate to the same improvement. Similarly, a longstanding commercial relationship between parties cannot, in itself, create a prevenient arrangement. The parties must have intended, or contemplated, a continuing arrangement meeting the criteria listed above, rather than a general credit account or a series of separate contracts.
If such a continuing arrangement has not been contemplated, the contractor or supplier must be vigilant in monitoring its unpaid accounts to ensure that a builders’ lien is registered within 45 days of the completion of each separate contract.
If a prevenient arrangement does exist, there may be significant holdback implications on the Owner. In particular, the Owner may be required to holdback an accumulated amount to cover the whole prevenient arrangement, until 45 days after the last service or material is furnished. This may be problematic because of the potential cash flow issues that can arise when a contractor or supplier does not receive the holdback in a timely manner. Conversely, an Owner who fails to maintain the appropriate amount of holdback may be at risk of having to pay twice in the event of an insolvency.
However, given the practical realities of an oilsands worksite, it may be difficult for a contractor and supplier to issue an invoice and expect payment within 45 days, as billing and payment often take much longer. This places the contractor and supplier in a difficult position. If the contractor or supplier takes no steps within 45 days to protect their rights under the BLA, they may lose the ability to lien for that particular service or material. Conversely, if the contractor or supplier takes the steps to protect their rights by registering a lien within 45 days on each site where the services or materials were furnished, they risk straining their relationship with the Owner of the project, who is very unlikely to approve of this course of action.
There is a mechanism for contractors, suppliers, and Owners, to protect themselves from the issues above. As indicated, lien rights may extend to cover the whole of a continuing arrangement if it can be shown that the parties intended this to happen.
To establish this intention, a term can be included in the contract to the effect that the parties agree that the continuing arrangement will constitute a “prevenient arrangement” for the purposes of the Builders’ Lien Act. Conversely, an Owner may want to avoid prevenient arrangements, and can even consider express contractual clauses disclaiming the existence of a prevenient arrangement. However, it is important to keep in mind that merely stating that the arrangement is a “prevenient arrangement” does not necessarily make it so. Although an express provision is likely to resolve any ambiguity regarding intention, the parties should still strive to satisfy the criteria specified above.
It may be mutually beneficial to the Owner and the contractor/supplier to not only be aware, but expressly address the prevenient arrangement issue in any contract, when appropriate.
¹ Schlumberger Holdings (Bermuda) Ltd. v. Merit Energy Ltd., 2001 ABQB 34 at para. 39.