Construction Disputes And Contractual Interest Clauses

When disputes arise on construction projects, a party sometimes withholds payment from another pending resolution. Construction agreements often include terms requiring payment of interest from the date payment is due. Those agreements may include high rates of interest, particularly in residential construction context. It is not unusual to see interest rates as high as 30% per annum or more.

A recent decision of British Columbia’s Court of Appeal highlights the risk in withholding disputed funds. In Highridge Homes Ltd. v. de Boer, 2023 BCCA 74 (“Highridge”), a homeowner discharged a claim of builders lien by paying money into its lawyer’s trust account. The money was deposited in 2016 and dispute went to trial in 2021. The construction agreement between the parties provided for interest to accrue on unpaid accounts at 12% per annum. At trial, the contractor was granted judgment against the homeowner.  However, the Court dismissed the contractor’s claim for interest at 12% per annum, finding that the payment to its lawyer’s trust account in 2016 was equivalent to a payment to the contractor. The contractor appealed.

The Court of Appeal reversed that finding. The Court held that payment into the lawyer’s trust account was not the same as a payment to the contractor. This was because, in part, the owner continued to claim entitlement to the funds and had not relinquished control of them. The Court also referred to earlier precedent which held that funds paid as security for a lien are not payments to contractors. As a result, the homeowner was required to pay 12% interest on the judgment for the five-year period between paying the funds into trust and judgment.

Highridge underscores that parties should carefully review their construction agreements to ensure they appreciate the implications of contractual interest provisions. Consideration should be given to whether payment is made under protest, particularly where the outcome of the dispute is uncertain and the agreement provides for a high rate of interest. This should be weighed against the party’s ability to repay disputed funds in the event of a judgment against it.

The above is intended as general information only. You should consult a lawyer if you have concerns about your construction agreement.

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