Owners Beware: Factoring Invoices Should Not Be Factored Into The Major Lien Fund

• Published date: 09 June 2022
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Corporate and Company Law, Contracts and Commercial Law, Construction & Planning
• Law Firm: Miller Thomson LLP
• Author: Ms Emma Johnston and Bryan Hosking

In Factors Western Inc. v DCR Inc., 2021 ABCA 433 ("Factors Western"), the main issue that the Alberta Court of Appeal was faced with was determining whether or not an invoice that was factored between a project owner, a general contractor (who had since been placed into receivership), and a third party purchaser formed part of the major lien fund under the Alberta Builders Lien Act, RSA 2000 c B-7 (the "BLA").

When dealing with cash flow restraints, it is not unusual for companies to "factor" their accounts receivable, a process where accounts are sold to a third party at a discount for immediate cash. This practice, colloquially referred to as "factoring," is not unusual in the construction industry where quick access to funds is an important operating requirement when advancing a project.

As provided for by the Supreme Court of Canada it has been held that factoring agreements contain three elements:

1. purchasing a business' book debts;
2. taking over and administration of a business' credit control function relating to that debt; and
3. providing a business with immediate financing in the amount of a specified percentage of the debt.¹

Factoring can be invaluable in the construction industry especially where companies are looking for a cash flow solution outside of traditional funding from a financial institution. With interest rates on the rise and access to capital at the forefront of the industries' mind, factoring arrangements will likely be seen as an appealing alternative to traditional debt; however, pursuant to the Court of Appeal's reasoning in Factors Western, an invoice that has been factored should not be included as an "amount payable under the contract" when calculating the major lien fund under the BLA.

Background

In Factors Western, three actions were commenced by parties wherein the outcome would be affected depending on the legal implications of an invoice that was factored.

1. The first action was commenced by the owner of certain lands Point Design Homes Ltd. ("Point Design"), which lands had been subject to certain builders liens. Point Design pursued an order setting the major lien fund under the BLA;
2. The second action was commenced by a subcontractor on the project in question, Slimdor Contracting Ltd ("Slimdor"), where Slimdor sought an order confirming the validity of its two builders' liens;
3. The third action was commenced by Factors Western Inc ("FactorCo"), which action sought judgment against Point Design with respect to an...