Canada: Unpaid Subcontractors Gain Protection: The Supreme Court Of Canada Clarifies The Builders' Liens Act

Last Updated: September 29 2015
Article by Scott H.D. Bower, Christopher Petrucci and Peter Amrhein

An unpaid subcontractor has both a builder’s lien and a trust remedy, the Supreme Court of Canada (SCC) just determined in Stuart Olson Dominion Construction Ltd v Structal Heavy Steel, 2015 SCC 43. In a unanimous decision, the SCC held that filing a lien bond as security for a builder’s lien did not excuse a contractor from its trust obligations under Manitoba’s Builders’ Liens Act, CCSM c. B91 [the BLA].

Facts

The primary contractor, Stuart Olson Dominion Construction Ltd. subcontracted work on an arena to Structal Heavy Steel. Dominion claimed that Structal delayed construction and withheld payment from Structal. In response, Structal registered a $15 million builder’s lien against the arena. A month later, Dominion filed a lien bond in the full amount of the builder’s lien pursuant to which a surety agreed to pay the total sum of any judgment on the lien. Structal agreed to the bond, the bond was filed with the courts, and Structal discharged its lien.

Despite the bond and lien discharge, Structal continued to claim that, until its work was paid for, sums received by Dominion from the owner of the arena were subject to a BLA trust in Structal’s favour. In particular, Structal asserted that a progress payment of $3.5 million was subject to a statutory trust. The owner was supposed to make the payment to Dominion, but was persuaded by Structal not to. Dominion then brought an application for a declaration that it was entitled to receive and use that progress payment to pay others. According to Dominion, the lien bond excused it from the BLA’s trust provisions as they applied to Structal.

The Statutory Provisions

Structal’s claim to the $3.5 million was based on the BLA’s provisions that create a statutory trust for subcontractors, which, in part, state:

4(1)(a) All sums... received by a contractor on account of a contract price constitute a trust fund for the benefit of ... sub-contractors who have sub-contracted with the contractor...;

...

4(3)(a) A contractor receiving a sum mentioned in subsection (1) is the trustee of the trust fund and he shall not appropriate or convert any part of the trust fund to or for his own use or to or for any use not authorized by the trust until... all sub-contractors who have entered into a sub-contract with him... have been paid all amounts then owing to them out of the sum received.

In essence, the courts had to decide whether the existence of the lien bond posted by Dominion satisfied its trust obligations under the BLA.

The Courts Below

The Manitoba Queen’s Bench agreed with Dominion. The lien bond allowed the contractor to avoid the obligations created by Section 4. The alternative was commercially unreasonable and contrary to the intention of the legislation.

The Manitoba Court of Appeal overturned the Queen’s Bench on this point. According to the Court of Appeal, the lien and trust provisions create separate remedies. It held that reliance on one does not affect the other.

The Supreme Court of Canada

The SCC upheld the Court of Appeal’s decision and decided that the existence of a lien bond does not allow a contractor to avoid the trust provisions of the BLA.

The SCC held that the builder’s lien and trust remedy are separate and distinct. In particular, the trust provisions encumbered funds received by the contractor “for not only subcontractors, but also the Workers’ Compensation Board, any workers employed by the contractor, and the owner for any set-off or counterclaim relating to the performance of the contract” (para 32). The BLA also requires trust funds to be reserved until all subcontractors and persons who supplied materials or services have been paid. A lien, on the other hand, simply secures a legal claim. Unlike a trust, it does not actually “impose obligations... with respect to funds received” (ibid). As a result, a lien bond does not actively prevent a contractor from exhausting its resources before paying its subcontractor. The bond merely provides the subcontractor comfort that it will be paid if its claim is successful.

The Court further held that the purpose of the statutory trust would also be frustrated if a contractor could escape its obligations by filing a lien bond. It found that the BLA’s trust provisions are designed to help ensure that money payable by owners, contractors and subcontractors is distributed to the deserving parties. Dominion, in essence, wanted to utilize funds that the trust provisions would otherwise reserve for Structal. The SCC said that such an interruption of the flow of funds was the very problem that the trust provisions were designed to address.

These practical differences and consequences, combined with the provisions’ statutory history, prior interpretation, and other implications of the BLA, led to the conclusion that the remedies are distinct.

Practical Implications

The business consequences for prime contractors in Manitoba are fairly clear, however, the impact of this decision in Alberta is less certain.

In Manitoba, if the trust provisions apply, a party “who chooses to file a lien bond with the court instead of depositing the funds at issue must maintain the trust fund in addition to the bond” (para 47). The SCC added that a contractor can avoid having to provide such double security by paying the trust funds into court to secure the lien instead of depositing a lien bond. Thus, a lien bond may be a less attractive way to secure a lien where the underlying facts that enable the lien also give rise to a trust.

The consequences of the Stuart Olson decision in Alberta are likely different from Manitoba since Alberta’s builder’s lien legislation (the Builders’ Lien Act, RSA 2000, c B-7 [BLA Alberta]) is not the same as Manitoba’s. In Alberta, funds received by a contractor are not subject to a statutory trust until they are paid after a certificate of substantial performance has been issued (BLA Alberta, s 22(1)(b)). Thus, the double security dilemma may not arise until money is received after substantial performance.

That said, once the certificate is issued the trust provisions of the BLA Alberta are engaged. Should a lien then be registered, a contractor in Alberta will have to decide to: (1) let it encumber the property, (2) file a lien bond and hold any funds then received in trust, or (3) submit any funds held in trust to the court to secure the lien claim.

The SCC was quick to add that a claimant will “never” be able to receive money under both a lien and a trust “for the same work, services, or materials” (para 48). Instead, “payment made under the trust will eliminate the equivalent amount payable to satisfy the lien claim” (ibid). The SCC recognized, by way of example, that the amount of the lien bond posted by Dominion would have been reduced, dollar for dollar, had Dominion paid monies held in trust to the court.

Conclusion

Whichever jurisdiction is in issue, the SCC has now clarified that the two statutory rights exist separately. This ruling may be considered as a victory for subcontractors. They now have the ability to avail themselves of the builder’s lien remedy in addition to the trust remedy provided for in builder’s lien legislation. In Stuart Olson, the mere allegation of a debt prevented Dominion, and the owner of the arena, from utilizing significant sums of money. In Dominion’s case, the cost of Structal’s claim was compounded by the fees associated with the lien bond. Such hardship did not seem to bother the SCC. Rather, the panel unanimously decided that this result reflected the intent of the legislature of Manitoba.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Scott H.D. Bower
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