Background

In December 2010, Stuart Olson Dominion Construction Ltd. (Dominion) was hired to act as general contractor to construct a football stadium at the University of Manitoba. Dominion entered into a subcontract with Structal Heavy Steel under which Structal would supply and install steel for the project. On September 7, 2012, Structal registered a builders’ lien against the property totalling more than $15.5 million comprised of $3.5-plus million for past-due invoices; $633,885.28 for invoices falling due on October 1, 2012; roughly $3.3 million for statutory holdback, and more than $8 million for delay. Dominion filed a lien bond in court in the full amount of the lien. Structal approved the bond and vacated the lien.

Structal then asserted that Dominion was required to comply with the trust provisions of the Manitoba Builders’ Lien Act (MBLA) and to continue making payments owing to Structal out of the progress payments received from the owner. Dominion refused to make further payments and brought an application to seek a declaration that it had satisfied its MBLA trust obligations to Structal by filing the lien bond in court. Structal filed its own motion requiring full payment of its past-due invoices of more than $3.5 million, without deduction or set-off, upon Dominion receiving the funds from the owner.

The Manitoba Court of Queen’s Bench held that Dominion’s filing of the lien bond extinguished its trust obligations to Structal under the MBLA. The Manitoba Court of Appeal overturned the ruling, concluding that subcontractors have two separate and distinct rights beyond the common law right to sue for breach of contract: (i) the right to the statutory trust, and (ii) the right to file a lien claim against the property.

Applicability to Alberta

Because of the differences in provincial lien legislation, the effect of this decision for the purposes of Alberta construction projects is somewhat limited. Under the Alberta Builders’ Lien Act (ABLA), the funds which are subject to trust obligations are more limited and the restrictions on the use of the trust funds are less restrictive.

However, the principles of this case will be applicable to contractors and subcontractors in Alberta who receive payments on a construction contract after the certificate of substantial performance has been issued. In such circumstances where lien and trust claims arise simultaneously, it may be advantageous to pay money into court to vacate a lien rather than posting a lien bond.

Applicability to Ontario

The salient provisions of the Manitoba provincial lien legislation and Ontario’s Construction Lien Act1 are almost identical, and as such, the principles of this case will be applicable to contractors and subcontractors in Ontario, with respect to amounts received or owing to a contractor or subcontractor on account of the contract or subcontract price. The contractor, Dominion, contended that any requirement for Dominion to both file the lien bond to stand as security for the lien and to maintain a separate trust fund for the undisputed and unpaid invoice amounts would amount to double payment. While the court rejected this contention, by making a distinction between payment and posting security for the lien, there is no doubt that the contractor’s operating capital was impacted. As such, we may see an increase in the practice of cash being posted to vacate liens in Ontario, rather that bonds or other forms of security.

Applicability to British Columbia (BC)

In BC, subcontractors also have access to both the trust remedies and the lien remedies under the British Columbia Builders’ Lien Act (BCBLA) separately, however the BCBLA imposes a trust over money in the hands of the owner only in relation to the holdback account, as opposed to in Manitoba where the MBLA trust applies to other funds as well.

Therefore, in relation to monies held by a BC owner, the BCBLA trust, and the findings in this decision, likely only apply to the holdback account and not to other amounts.

  • 1. Does the filing of a lien bond extinguish an associated trust claim under the MBLA?

In a unanimous decision, the Supreme Court of Canada (SCC) dismissed the appeal and held that, under the MBLA, the filing of a lien bond does not extinguish an owner’s or contractor’s obligations under the statutory trust.

The SCC concluded that the MBLA provides for two distinct and separate remedies, with the trust remedy being more far reaching than the lien remedy.

Dominion asserted that the trust provisions of the MBLA have only the narrow purpose to provide security to subcontractors whose claims might not be protected by a lien. The SCC found that the text of the MBLA rather supports that each remedy is separate and distinct by providing in section 66 of the MBLA for the concurrent pursuit of a claim related to a trust fund and an action to realize a lien.2

Dominion also argued that where a lien bond has been filed, the bond should stand as security for any potential claim, including trust claims. The SCC disagreed, stating that to do otherwise would undermine the purposes of the statutory MBLA trust, which the SCC quoted as being “to help assure that money payable by owners, contractors and subcontractors flows in a manner which is in accord with the contractual rights of those engaged in a building project and is not diverted out of the proper pipeline.”3 The SCC also noted that, while the MBLA trust protects the funds owing to a subcontractor until such funds “have been paid”:

A subcontractor has not been paid simply by the filing of a lien or by funds or security being posted with the court for the purpose of vacating the lien. A lien bond merely secures a contractor’s or subcontractor’s lien claim rather than satisfying it through payment. It does not extinguish the owner’s or contractor’s obligations under the statutory trust. f

The SCC rejected Dominion’s contention that where lien and trust claims are for the same work, services or materials, unless a payment into court to vacate a lien satisfies the trust provisions of the MBLA, a contractor or owner may be required to pay funds twice. A payment into court or the posting of the lien bond does not constitute payment, but rather constitutes security. While a contractor may in some cases choose to maintain double security by acquiring a lien bond while at the same time holding trust funds, a contractor can avoid double security by paying cash into court. This will vacate the lien while at the same time ensuring the monies are held in trust for the beneficiary under the MBLA trust. The SCC stipulated that “payment of trust funds into court to vacate a lien, for the amount of the lien claim implicated by the trust claim, does not constitute an appropriation or conversion of the trust funds.”5 Should the lien claim then fail while the trust claim is outstanding, the cash paid into court would continue to be trust funds when returned to the owner or contractor.

The SCC confirmed that there will never be a requirement for the owner or contractor to pay funds to a claimant twice, as any payments made to the claimant under the trust will eliminate the equivalent amount payable to satisfy the lien claim. However, premiums paid by a contractor or subcontractor under a lien bond are not recoverable against a claimant, as such premiums merely represent the cost of the type of security chosen.

Takeaways

Below are six key takeaways resulting from this decision:

  • The trust provisions under provincial builders’ lien statutes can apply with respect to governmental and other land which is not subject to statutory builders’ liens.
  • Under the MBLA, a contractor or subcontractor on a construction contract may not appropriate or convert any part of the sums received on account of the contract price for the benefit of subcontractors, the WCB, its own workers or the owner with respect to the performance of the contract until all such subcontractors, the WCB, workers or other beneficiaries are paid the amounts then owing to them out of such sums (MBLA s. 4(1), 4(3)).
  • The statutory obligation to pay trust funds to beneficiaries is separate and distinct from a contractor’s or subcontractor’s obligations to maintain statutory holdbacks.
  • The posting of a lien bond into court for the purposes of vacating a builders’ lien does not satisfy a contractor’s or subcontractor’s statutory trust obligations to pay subcontractors or other parties amounts owing to them out of progress payments received from an owner or contractor.
  • Paying money subject to a statutory trust into court for the purposes of also vacating a lien does not constitute an appropriation or conversion of the trust funds.
  • If there are concurrent lien and statutory trust claims, and the contractor or subcontractor chooses to vacate the lien by posting a lien bond, it will still need to maintain the trust funds separately as the posting of the lien bond will not extinguish the statutory trust claim. For this reason, it may in such cases be more cost effective to pay money into court for the purposes of vacating the lien and maintaining the trust funds, and thus dispense with paying premiums on a lien bond.