Determining when a construction contract is terminated is important for all parties involved in a project. For contractors and subcontractors, it can dictate lien filing deadlines. For owners, it can determine holdback obligations.
The case and decision
In May 2022, Justice Lamb of the British Columbia (BC) Supreme Court released a decision that a mid-project termination of the general contractor did not result in a termination of the head contract for the purposes of the BC Builders Lien Act. The court found that by hiring a new replacement contractor to complete all of the original work, the owner intended to assign, rather than terminate, the original head contract. As a result, the owner was required to continue to retain the holdback from the original head contract while the project was completed by the new replacement contractor.
The owner hired a general contractor for the construction of a high school in Coquitlam, BC. After a series of defaults, the owner terminated the construction contract and entered into a new contract with a replacement contractor.
In the new contract, the replacement contractor:
- Acknowledged that the owner had retained a holdback of approximately CA$4.2M, representing 10% of the certified value of the work completed under the original contract;
- Agreed to assume full responsibility for “each and every obligation and duty originally undertaken and as yet unperformed” under the original contract; and
- Agreed to perform the work in the same manner as if it “had been the original contractor” under the original contract.
At some point before the replacement contractor completed construction, the parties considered whether the owner could use the CA$4.2M in holdback funds retained under the original head contract towards payment of completion of the work. The argument was that since the original contractor had been terminated more than 55 days before, the holdback funds could be released.
Had the original head contract been terminated pursuant to the Builders Lien Act, thus triggering the 55-day clock for release of the holdback?
The law and decision
Section 8(2)(a) of the Builders Lien Act provides that where a certificate of completion is not issued, the holdback period expires at the end of 55 days after the head contract is completed, abandoned, or terminated.
Justice Lamb concluded that it was the owner’s intention for the original contract to remain in force, as the replacement contractor assumed all of the original contractor’s rights and obligations. It was held that the termination of the original contractor and retention of the replacement contractor was, in effect, an assignment of the original contract, and therefore, Section 8(2) was not triggered because the head contract had not been terminated. As a result, the lien filing period would not expire until 45 days following substantial completion of the work under the replacement contract. Similarly, the holdback period would not expire until 55 days following substantial completion of the work under the replacement contract.
The Court explained that this decision was consistent with the intention of the Builders Lien Act: to ensure those who supply labour, services, and materials to a construction project are paid. Oftentimes, subcontractors have no knowledge of the state of the contractual or legal relationship between the owner and general contractor. In this case, it may not have been apparent to subcontractors who completed work under the original contract that the contract had been terminated.
Do not assume that terminating the head contractor mid-project will result in termination of the contract pursuant to the Builders Lien Act. Instead, it is possible for an owner to replace its general contractor without terminating the head contract, if the arrangement with the replacement contractor creates an assignment of the original head contract.
The law applicable to builders’ liens is constantly changing. A party considering filing a lien claim or distributing the holdback would be prudent to pay close attention to the developing case law and seek professional legal advice in a timely way.