Saskatchewan Court of Appeal Clarifies Priorities Between Builders’ Lien Claimants and Secured Creditors of Oil & Gas and Mining Projects
In its July 20, 2017 decision in National Bank of Canada v. KNC Holdings Ltd., 2017 SKCA 57, the Saskatchewan Court of Appeal has clarified priorities between builders’ lien claimants and secured creditors in priority disputes involving extracted oil and gas and mineral ore. In his unanimous decision for a panel of five Appellate Judges, Chief Justice Richards determined that the Court’s 1982 decision in Canada Trust Co. v. Cenex Ltd. (1982), 131 DLR (3d) 479 (Sask CA) (“Cenex”) was wrongly decided. The result is to overturn 35 years of Saskatchewan case law based upon Cenex.
As in most jurisdictions, the general rule under Saskatchewan’s builders’ lien legislation is that secured creditors holding security interests in the assets of owners of construction projects have priority over the claims of lienholders who subsequently provide materials or services as improvements to those projects after the security interests are registered.
However, to the surprise and consternation of many lenders, a limited exception to this general priority approach had developed over the past 35 years in favour of Saskatchewan lien claimants who had provided materials or services as improvements to oil and gas or mining projects. Case law based on Cenex interpreted Saskatchewan’s builders’ lien legislation as giving priority to lien claims of energy and mining lien claimants over the pre-existing security held by secured lenders in regard to extracted oil and gas and mineral ore.
Cenex and Its Progeny
This line of cases extends back to Cenex, a case decided under section 12 of the now-repealed Mechanics’ Lien Act. The Saskatchewan Court of Appeal decision in Cenex held that lien claimants providing services or materials to improve an oil and gas project ranked in priority to claims of pre-existing secured creditors who had advanced financing to the owners of those oil and gas projects as against extracted oil and gas or mineral ore.
The Mechanics’ Lien Act was repealed and replaced with The Builders’ Lien Act. What had been section 12 of The Mechanics’ Lien Act was repealed and replaced with section 22 of The Builders’ Lien Act. For all practical purposes, the two sections were functionally identical.
The issue of priorities between pre-existing security of secured lenders to owners of mineral projects and lien claims of subsequent lienholders came before the Saskatchewan Court of Queen’s Bench in the context of section 22 of The Builders’ Lien Act in Cambrian Blasting Co. v Trican Well Services Ltd. 2003 SKQB 355. In its decision in that case, the Court of Queen’s Bench ruled that Cenex was still good law in Saskatchewan and lienholders had priority to extracted ore over pre-existing secured creditors.
The Court of Queen’s Bench applied Cenex and Cambrian Blasting to decide similar priority disputes in favour of subsequent lienholders to oil and gas projects in Boomer Transport Ltd. v. Prevail Energy Canada Ltd. 2014 SKQB 368 (Rothery J.) and KNC Holdings Ltd. v FTI Consulting Canada Inc., 2016 SKQB 349 (Labach J.) (“KNC Holdings Ltd.”).
KNC Holdings Ltd.
An appeal from the Queen’s Bench decision in KNC Holdings Ltd. was heard by a panel of five judges of the Saskatchewan Court of Appeal. In its unanimous decision allowing the appeal, the Court of Appeal ruled that Cenex had been wrongly decided, for three essential reasons.
First, the Court concluded that, on the basis of the ordinary and grammatical meaning of its own language, section 22 of The Builders Lien Act, SS 1984-85-86, c B-7.1 (the “BLA”) was an “attachment” provision and not a “priorities” provision. In other words, section 22 of the BLA simply clarified that liens arising in oil and gas and mining operations extend to all of the “estates or interests” in the mineral, to the mineral after it is severed from the land and to the interest of the owner in fixtures, machinery, tools and appliances. However, section 22 of the BLA does not in any way address the priority of builders’ liens as against other interests.
Second, the Court concluded that the phrase “all the estates and interests in the mineral concerned” was included in section 22 of the BLA to ensure that arrangements such as “farm-ins” and joint ownerships (common in the oil and gas industry) do not frustrate the builders’ lien regime. The Court rejected the interpretation adopted in Cenex – that the phrase “all the estates and interests in the mineral concerned” was included in the legislation in order to subordinate the interests of pre-existing secured creditors.
Third, the Court concluded that the interpretation of section 12 of The Mechanics’ Lien Act adopted in Cenex as creating a priority for lienholders which was restricted to the extracted ore could not be reconciled with the plain wording of section 12 of that statute.
The Court of Appeal decision in National Bank of Canada v. KNC Holdings Ltd. has clarified the interpretation of section 22 of the BLA in regard to oil and gas and mining projects. It has also overturned the past 35 years of outcomes in Saskatchewan whereby the pre-existing security interests of secured creditors of oil and gas and mining projects saw their security defeated by subsequent builders’ liens.