When a contractor posts a bond to secure the construction builder’s lien claim of its subcontractor and the subcontractor discharges its lien, does the contractor continue to have any trust fund responsibilities to the subcontractor? Must the contractor continue to pay to the subcontractor the money it receives from the owner, particularly money received from the owner relating to the work done by the subcontractor?

The Manitoba Court of Appeal recently answered Yes to both these question in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel. The court held that the filing of the lien bond does not impair the trust fund rights and obligations under the Manitoba Builders’ Liens Act.

Background

Dominion was the general contractor and Structal was the structural steel subcontractor on a construction project. Structal asserted an $8 million delay claim against Dominion. It filed a builder’s lien in the amount of about $15 million which, beside the delay claim, included about $3.5 million in unpaid invoices and about $3.3 million in statutory holds.

Dominion filed a lien bond for the full $15 million. Structal then discharged its builder’s lien but it continued to assert that it was entitled to be paid for the work it had done.  Sructal’s work was entirely completed and there were no lien claims arising from Structral’s sub-contractors’ work.

Structal had not been paid all the progress payments or the statutory holdback and both amounts were being held by the owner. Structal sought payment of that money. Dominion asserted that it was entitled to that money from the owner and applied to the court for an order declaring that the filing of the lien bond satisfied its trust obligations to Structal and that, upon the receipt from owner of the outstanding progress payments on account of Structal’s work, Dominion could pay those funds to other creditors. Structal opposed Dominion’s application and brought its own motion for an order requiring Dominion to pay Structal all of that money.

The motion judge held that the filing of the lien bond by Dominion satisfied its trust obligations to Structal and that, upon receipt of the progress payments from the owner, Dominion was entitled to pay them to other creditors without being in breach of the trust provisions of the Act.  I dealt with that decision in my article on August 26, 2013.

Manitoba Court of Appeal’s decision

The Court of Appeal reversed the decision of the motion judge. The court held that the lien rights and the trust fund rights of contractors and subcontractor are entirely separate. The mere fact that the contractor had chosen to post a bond for the lien rights did not affect the subcontractor’s trust fund rights.

The court pointed out that it was the contractor, not the unpaid subcontractor, which decided to file a lien bond. The lien bond did not secure the claim any more than did the land. The court noted that the claim must still be proved before steps may be taken by the claimant to realize upon the underlying asset. In these circumstances, the contractor’s decision to file the lien bond could not, in the court’s judgment, affect the subcontractor’s trust fund rights.

In addition, the lien bond was no more than a substitute for the lien on the land, and just as placing a lien on the land does not remove or impair the trust fund rights of the subcontractor, nor does the lien bond. As the court said:

“In my view, it would be unheard of for a contractor to say to a subcontractor that, because he had filed a lien claim, the contractor was no longer obligated to comply with the trust obligations under the Act. Indeed, it is almost inevitably the case that lien claims are advanced because of late payment and a concern as to the possibility of non-payment. It is difficult to understand how, in such a circumstance, a subcontractor, by reason of filing a lien claim, should then be deprived of the benefits of the trust provisions of the Act. And, if that is so with respect to the lien claim filed against the land, it must be so with respect to a lien bond which, as the Act clearly provides, stands in the place of the land.”

Discussion

The Manitoba Court of Appeal’s decision preserves the funnel payment system in the Act. If a contractor could, by filing a lien bond, divert monies from the owner out of that system – and monies payable by the owner for the very work done by the unpaid subcontractor – then a leak in that funnel would arise.  If there are adjustments to be made when the owner pays further trust funds to the contractor, then the adjustment can be made to the amount of the lien bond, if necessary.

As I noted in my article of August 26, 2013, there are two aspects of the lien bond and trust fund sections of the construction/builders’ lien legislation that are noteworthy.

First, the provincial lien statutes are different.

In Manitoba, sub-section 5(3) allows the owner to retain or use trust funds if the contractor has been paid and “provision for the payment of other affected beneficiaries of the trust fund has been made.” The words “provision for payment” also appears in sub-sections 4(3) and 4(4) with respect to the trust fund obligations of contractors and subcontractors.  In each case the contractor’s and subcontractor’s obligation to ensure that provision is made for payment of other affected beneficiaries is in addition to the primary obligation to ensure that the next contractor or subcontractor down the chain is paid.  These words seem to contemplate that, as long as the next contractor is paid and if a lien bond is in place to look after other claimants, then the owner, contractor or subcontractor can make payments from trust funds. However, the obligation to see that the next subcontractor in the chain is paid is paramount and that obligation supports the Court of Appeal’s decision that Dominion (the contractor) was not entitled to the trust funds until Structal (the subcontractor) was paid.

In contrast, sub-sections 7(4), 8(2) and 9(2) of the Ontario Act simply state that the trust is in place until the contractors or subcontractors “are paid.” There is no reference to additional protection for other affected beneficiaries. In the Ontario Act, specific provision is made in section 12 for set-off by a trustee such as an owner, but not in respect of the amount of holdback. The Ontario Act seems to clearly recognize that, until the subcontractor is paid, the subcontractor’s trust fund rights are not impaired by the other provisions of the Act.

The Manitoba Court of Appeal has upheld the primary obligation in the trust fund sections- to use the trust funds to pay the next person in the payment chain. The court has effectively held that the extra protection in the trust fund sections of the Manitoba Act –namely, that the owner (or other person with the trust fund obligation) must also protect other affected beneficiaries – does not allow the lien and lien bond provisions of the Act to diminish the primary trust fund obligation. Accordingly, that decision appears to be applicable to other provincial lien statutes like Ontario’s which contain only the primary obligation and do not contain the extra protection.

Second, none of these statutes makes a direct and explicit connection between lien rights and lien bonds, and trust fund rights.  For example, no specific provision for setoff is made in the trust fund sections of the Manitoba Act. None of the courts in the Stuart Olson v Structal case commented on this disconnect but perhaps the Court of Appeal did so by inference. It held that the lien rights are entirely separate from the trust fund rights. For this reason, no connection is necessary.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed. Chapter 11, parts 4(m) and 6.

Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel 2014 MBCA 8

Construction and builders’ liens – lien bond – security for lien claims – trust funds

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                 March 8, 2014

www.heintzmanadr.com

www.constructionlawcanada.com