A third option exists
By Kirk A. Vilks, Fillmore Riley
In the Q3 2014 edition of Piling Canada, Sven Hombach wrote an article titled, “Paying Once, Paying Twice.” The article discussed a decision by the Manitoba Court of Appeal in Olson (Stuart) Dominion Construction Ltd. v. Structal Heavy Steel. That decision has now been reviewed and upheld by the Supreme Court of Canada in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel. While the Supreme Court upheld the Manitoba Court of Appeal’s decision, they also provided some additional comments that will help guide contractors who wish to avoid providing double security for a subcontractor’s lien.
The decision deals with the remedies in builders’ lien legislation. Each province has their own such legislation, but the effect of the various statutes is similar. Builders’ lien legislation provides two remedies to trades to ensure they are paid for their services: statutory liens and statutory trusts. A lien creates an encumbrance on the land. To remove the lien, money can be paid or security can be provided by the owner or general contractor. The security provided is usually in the form of a lien bond. The payment or security stands in place of the land, so that the land itself is no longer encumbered while the merits of the lien claim are decided. Under either scenario, the purpose is to ensure the subcontractor gets paid, either from the value in the land or from the value of the security posted to discharge the lien.
In addition to the lien remedy, builders’ lien legislation provides for a statutory trust. The legislation provides that subcontractors, workers employed by the contractor, and other beneficiaries are to be paid before an owner or general contractor can use trust funds for their own use. All funds received by the general contractor for the general contract are trust funds held for subcontractors, the Workers Compensation Board, employees of the contractor and the owner for any counterclaim related to the performance of the contract. If a general contractor uses funds that are held in trust for a subtrade for his or her own purposes, the result can be stiff fines or jail time for breaching the trust.
Olson (Stuart) Dominion Construction Ltd. v. Structal Heavy Steel involved a lien claim by a steel subcontractor totalling approximately $15.5 million to construct the roof of Winnipeg’s new football stadium. The general contractor deposited a lien bond into court for the full amount of the lien claim to discharge the lien. The subcontractor then demanded payment under the trust provisions of the statute. The contractor sought a declaration from the court that the lien bond satisfied its trust obligations under the builders’ lien legislation.
Like the Manitoba Court of Appeal, the Supreme Court of Canada made it clear that liens and statutory trusts are separate and distinct remedies. If a contractor files a lien bond to vacate a sub-contractor’s lien, that will discharge the lien, but not satisfy the contractor’s trust obligations under the legislation. The contractor will still need to hold funds they receive from the owner under the contract in trust for the sub-contractor. The implication here is that the contractor will need to provide double security; both the lien bond and monies received from the owner held in trust.
After the Court of Appeal’s decision, many were left thinking that the contractor had two options: either provide double security or choose not to vacate the lien. The Supreme Court explained that contractors have another option: if a contractor wants to avoid posting double security but still wants to vacate the lien, he or she can pay money into court to vacate the lien rather than posting a lien bond.
46. There may be circumstances where a contractor will choose to maintain double security where there are lien and trust claims for the same work, services, or materials, by acquiring a lien bond while still holding trust funds. However, a contractor can avoid double security by paying cash into court pursuant to s. 55(2) instead of depositing a lien bond.
Money paid into court will remove the lien and still be considered to be held in trust for the subcontractor. Therefore, paying money into court rather than a lien bond satisfies both the lien and trust obligations.
Payment of the 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. The contractor is doing exactly what the Act requires – ensuring the monies are held in trust for the beneficiary.
If the contractor pays funds into court and the lien claim later fails, the monies paid into court will be returned to the contractor, but will still be held in trust for the subcontractor.
These funds remain impressed with the trust; should the lien claim fail while the trust claim is outstanding, the cash would continue to be trust funds when returned to the owner, contractor, or subcontractor. So long as the trust funds themselves are deposited with the court, the funds are secure and the trust has not been breached.
The takeaway for contractors is that there are three options when a subcontractor places a lien on property. First, they could allow the lien to remain on the property, second, remove the lien with a lien bond while simultaneously holding funds paid for the contract in trust, or third, pay money into court to remove the lien. The circumstances will dictate which option the contractor selects, and unfortunately, there may be times when none of the options appear to be a desirable option for the contractor. Subcontractors will know this and use it to leverage a more favourable settlement in litigation with the contractor. Even with the additional option given to contractors by the Supreme Court of Canada, the remedies offered by builders’ lien legislation remain powerful tools that, in the hands of savvy subcontractors, can be used to apply tremendous pressure on general contractors.
Kirk A. Vilks is an associate with Fillmore Riley LLP who practises primarily in the area of civil litigation, with a focus on construction and insurance litigation. You may reach him at 204-957-8358 or kvilks@fillmoreriley.com.
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