Does Posting A Lien Bond Eliminate A Contractor’s Trust Fund Obligations?

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.


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.”


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



Can A Lien Be Sheltered Under A Claim By A Lienholder Further Down The Supply Chain?


The sheltering rights under the Construction Lien Act are fundamental protections for contractors, subcontractors and suppliers on a building project. But the definitions of what circumstances give rise to protected sheltering are somewhat vague.  One question is whether the liens of “superior” contractors or suppliers can shelter under an action commenced by an “inferior” contractor. In other words, when a contractor hires a subcontractor or supplier, can the contractor shelter its lien under the claim of the subcontractor or supplier? It may seem odd that the word “shelter” could apply to a contractor in relation to a subcontractor hired by the contractor, and that the subcontractor’s lien could provide shelter for the contractor’s lien. But that was recently held to be valid sheltering in the decision of Master Wiebe of the Ontario Superior Court of Justice in The State Group Inc. v. Quebecor World Inc. and 4307046 Canada Inc.


The applicant, Kemp was a contractor on a project in which 4307046 was the owner. The project included a modification of an existing building and the construction of a new building.  The project was an owner-supervised project in which Kemp acted as a sort of general contractor and supervised other contractors, including Cee Elevator Services Ltd. (“Cee”) and George and Asmussen Limited (“GAL”).

Kemp sought to shelter its lien upon the perfected liens of Cee and GAL. The 90 day period for the perfection of the Kemp lien started to run on January 15, 2008.  So a lien which was perfected between January 15, 2008 and April 15, 2008 in relation to the same lands could potentially shelter the Kemp lien.  The purported perfection of the Cee and GAL liens took place within this time period. So those liens could potentially shelter the Kemp lien.

Reasons of the Court

Master Wiebe said that under section 36 of the Ontario Construction Lien Act the work of the lienholder (being Kemp) seeking to shelter its lien must be in respect to the same alterations, additions and repairs as the work of the lienholders, being Cee and GAL, under whose claim Kemp sought to shelter. The court also noted the Act does not require that “the work of the sheltering liens was in fact connected to the work of the sheltered lien.”  In the court’s view, such a requirement “smacks too much” of the proposition that sheltering must be “vertical”, a proposition which was essentially overturned by the Divisional Court in Sesco Ltd. v. Life Centre Non-Profit Housing Corp. (Ajax), (1998) 37 O.R. (3d) 764, 38 C.L.R. (2d) 66 (Div. Ct.; leave to appeal dismissed 1998 Carswell Ont 1430) (“Sesco”) . There is no need to establish a commonality of “services and materials,” as long as the work was “in respect of the same improvement.”   Master Wiebe said:

“I do not see how a party that supervises the work of the lien claimants under whose liens it purports to shelter can be doing its work on anything other than the same improvement.  To rule otherwise, would lead to the rather bizarre conclusion that the supervision of the work is somehow divorced from the work that is supervised to such an extent as to render them separate improvements.  This is not how the CLA section 36(4) was meant to be interpreted.”


Section 36(4) (b) of the Ontario Construction Lien Act states that a “sheltered claim for lien is perfected only as to the defendants and the nature of the relief claimed in the statement of claim under which it is sheltered.”  In Sesco, at first instance, Justice Ferguson held that the practical effect of second part of clause (b) was that the claim in the sheltering lien action had to refer to work claimed in the lien seeking to be sheltered.  He held that a lien could not be sheltered under a lien claim in another chain of work and payment on the project (which was the situation in Sesco), at least when that lien claim made no claim in respect of the work referred to in the lien sought to be sheltered.

In that decision, Justice Ferguson said:

 “I agree…that for practical purposes a lien seeking shelter can probably find it only under a perfected lien advanced by someone higher in the same payment stream.”  (emphasis added)

With Justice Ferguson’s decision having been over-turned, the court in State Group v Quebecor has now found that a circumstance is covered under the sheltering section which Justice Ferguson thought would not be covered, namely the sheltering by a higher lienholder under a lienholder’s claim lower in the payment scheme. So, not only is it not necessary that the sheltered lien be in the same payment stream as the sheltering claim (as held in Sesco).  In addition, within the same payment stream a lower claim can provide shelter for a higher lien.

As a result, the remedial reading of the Act in Sesco has resulted in much broader application of the sheltering provisions of the Ontario Act.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 11, part 2(f)

The State Group Inc. v. Quebecor World Inc. and 4307046 Canada Inc. 2013 ONSC 2277, 2013 CanLII 19660 (ON SC).

Building Contracts  –  Construction and Builders Liens  –  Validity of liens  –  Sheltering

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                               June 25, 2013


Does A Mediation Agreement Suspend The Limitation Period Or The Period To Set Down A Lien For Trial?

An agreement to mediate is often found in arbitration and building contracts. Yet, the impact of mediation upon court or arbitral proceedings is uncertain. Does an agreement to mediate mean that, until the mediation occurs, there is no cause of action and therefore there is no entitlement to commence arbitration or an action?  In that case, the limitation period would be effectively extended. In L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133, 2011 ONCA 435, the Ontario Court of Appeal held that, until a contractual obligation to negotiate a compromise had been fulfilled or terminated, no cause of action arose and the limitation period was not running.   

Or is an agreement to mediate simply not enforceable because an agreement to negotiate is not enforceable? If this is the case, then the limitation period is running and either party can ignore the mediation agreement and go to court or commence arbitration. The Ontario Court of Appeal so held in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 ONCA 218.

The uncertainty about the enforceability of mediation agreements creates real dangers for those engaged in dispute resolution under arbitration and building contracts. Fortunately, in Ontario there may be at least a partial solution in section 11 (“section 11”) of the Limitations Act, 2002 of Ontario (“Limitations Act”). This solution is often forgotten but in the recent decision in Tribury v. Sandro, the court held that a mediation agreement, once made, does effectively stop the limitation period from running.

However, there are other dangers arising from mediation agreements and limitation and procedural periods.  The Tribury decision did not expressly determine whether the mediation agreement would suspend the limitation period even if it was not an enforceable agreement to mediate.  In addition, section 11 only applies to limitation periods prescribed under the Limitations Act.  Thus, in Tribury, the court did not apply section 11 to the two year period for setting a lien action down for trial under section 37 of the Construction Lien Act (“section 37”).  What is the effect of mediations on all the other procedural and limitation sections found in Ontario statutes?

Section 11(1) states as follows:

“ If a person with a claim and a person against whom a claim is made have agreed to have an independent third party resolve the claim or assist them in resolving it, the limitation periods established by sections 4 and 15 do not run from the date the agreement is made until,

(a) the date the claim is resolved;

(b) the date the attempted resolution process is terminated; or

(c) the date a party terminates or withdraws from the agreement.”


Tribury was the general contractor on a construction project for Laurentian University.  Sandro was the structural steel subcontractor and Edward was Sandro’s structural steel consultant.  The project started in 2006 and ground to a halt in June 2007 due to the alleged failure of certain steel connections. Apparently, all parties accepted that the claims between the parties were “discovered” in June 2007 for the purposes of the Limitations Act. As will be seen later, one of the issues in the motions in question was whether some of the subsequent proceedings were brought within the basic two year limitation period set out in section 4 of the Ontario Limitations Act or, in effect, by June 2009.

In October 2008, Sandro commenced a construction lien claim against Tribury and Laurentian. The other issue in the motions in question was whether Sandro had set that lien claim down for trial within two years of that date as required by section 37 of the Construction Lien Act, or, in effect, by October 2010.

In December 2008, Tribury counterclaimed in Sandro’s lien action.  In April 2009, Tribury started its own action which was substantially the same as its counterclaim in Sandro’s lien action. While Tribury agreed to withdraw that counterclaim, the order dismissing the counterclaim was not made until November 2010.

The Mediation

In March 2009, Sandro suggested mediation to all parties. In April 2009, counsel for all the parties participated in a conference call and all the parties, with the exception of one party, agreed to participate in mediation. That agreement was confirmed by a letter from Tribury which suggested the names of mediators, proposed deadlines for the mediation briefs and confirmed the parties’ tentative consent to a cost sharing for the mediator’s fees. In July, 2009, Sandro delivered its mediation brief to Edward. In March, 2010 the parties chose a mediator. In August, 2010, a mediation date in November 2010, was scheduled.  On November 10, 2010, counsel for Edward advised the other parties that Edward was not prepared to mediate the “Sandro remediation costs”, namely the remediation costs which Sandro itself had incurred and was now claiming against Edward (as opposed to remediation claims being asserted by others against Sandro which Sandro claimed over against Edward). The mediation was cancelled.

The Impugned Proceedings

On December 3, 2010, Sandro issued a new Statement of Claim against Edward. On December 6, 2010, in Tribury’s 2009 action Sandro served a Statement of Defence, Crossclaim (against Edward) and Counterclaim (against Tribury).

The Motions

Edward then brought a motion to dismiss the December 2010 action and cross claim against it on the ground that the limitation period had expired.

Tribury bought a motion to dismiss Sandro’s lien action on the ground that it had not been set down within the two years period set forth in Section 37 of the Construction Lien Act. Section 37 requires that, within two years of the lien action that perfected the lien, an order must be made for the trial of an action in which the lien may be enforced, or an action in which the lien may be enforced must be set down for trial.  Otherwise, the lien action must be dismissed.

Tibury also sought an order dismissing Sandro’s December 2010 counterclaim on the basis that, by December 2010, the limitation period had expired for that counterclaim to be brought.

The Decision

1.      Section 11

So far as Sandro’s December 2010 claim and cross claim against Edward and its December 2010 counterclaim against Tribury, the Court held that the limitation period for commencing those claims was extended during the whole period from April 2009 to November 2010, and had not expired by the time that Sandro’s December 2010 claim, cross claim and counterclaim were commenced, by virtue of the mediation and the effect of section 11 of the Limitations Act.

First, the Court held that an agreement under section 11 did not have to specify that the limitation period was suspended until the conclusion of the mediation.  The suspension of the limitation period was effected by section 11 itself, without the parties having to say so. Their agreement to mediate, not any words agreeing to a suspension of the limitation period, caused the suspension.

The Court distinguished section 23(3) from section 11 of the Limitations Act. Sub-section 23(3) is the general provision allowing parties to agree to suspend or extend the limitation period.  That sub-section depends, for it to be activated, on the parties’ agreement to do exactly that, namely, suspend or extend the limitation period.  In contract, section 11 depends, for it to be activated, upon the parties’ agreement to mediate. If there is an agreement to mediate, it is section 11 which then suspends the limitation period. The Court said:

Edward has not convinced me that the agreement referred to in section 11 of the Limitations Act requires specific language suspending or extending applicable limitation periods for its efficacy. In my view, what is required is an agreement which is entered into after a dispute has arisen whereby the parties agree to have a third party assist in resolving the dispute, nothing more. In the case before the court, the parties entered into an agreement to mediate in response to a dispute which had arisen among them. They have therefore met the requisite test.

Whether there was an agreement to mediate was disputed. After reviewing the evidence, The Court held there was an agreement to mediate and that it included the Sandro remediation costs.  The Court found as follows:

The correspondence between the parties confirms their mutual intention to mediate the issues which arose following the failure of the steel connectors and I find that all parties decided to mediate these issues on the understanding that all outstanding damages issues would be mediated. Although the confirming letter did not specify which issues were to comprise the subject of the mediation, the agreement was open ended and not restricted in scope. There was a stated requirement in the letter confirming the mediation that both Sandro and Tribury submit damages briefs and there is no evidence that the parties intended that only some of the issues resulting from the failure of the steel connectors were to be mediated.

2.       Section 37

So far as Sandro’s lien claim, the Ontario Superior Court exercised its discretion to permit that claim to proceed as an ordinary contract claim, and struck out the lien itself on the ground that the action had not been set down within the two year period set forth in section 37. In so deciding, it did not consider whether the mediation, and section 11 of the Limitations Act, could extend the time set forth in section 37. Since section 11 only refers to limitation periods in the Limitation Act, the Court presumably thought that it was self-evident that section 11 did not apply to section 37.


There is good news (with a condition), bad news and two warnings arising from this decision.

First the conditional good news.  If parties who are involved in a dispute agree to mediate, they thereby suspend the limitation period under section 11.  This is a power that is often forgotten. The parties are not necessarily faced with a “do or die” alternative between commencing the proceeding on the one hand, or mediating and potentially letting the limitation period run out on the other hand.  By reason of section 11, they are protected against the running of the limitation period by a proper mediation agreement.

The condition to the good news is this. In Tribury the Court held that the mediation agreement suspended the limitation period without inquiring whether the mediation agreement was an enforceable mediation agreement, so far as the obligation to mediate is concerned. That is, the Court did not consider whether the mediation agreement contained enough details to make it an enforceable agreement to mediate. There are many recent cases, particularly in the United Kingdom, holding that an agreement to mediate is not enforceable unless that agreement contains sufficient procedural details.

One explanation of the Tribury decision could be that it is not essential that mediation agreement be enforceable as such for it to activate section 11: a           mediation agreement is enforceable to suspend the limitation period by virtue of section 11, even if it does not compel the parties to mediate.

Another explanation is that this issue was simply not considered, and that it is open for another court to conclude that, unless the mediation agreement contains sufficient details, it does not activate section 11.

Second, the bad news. Sections 11 and 23 only refer to limitation periods contained in the Limitations Act. They do not refer to limitation periods in any other Act, including the Construction Lien Act.  For this reason, the parties cannot rely on sections 11 or 23 to extend by agreement the limitation periods for the commencement of a lien action or the statutory period for setting a lien action down for trial.

Nor do sections 11 or 23 apply to limitation periods, or periods for taking steps, in other statutes.  For example, the Arbitration Act, 1991 of Ontario contains a number of limitation periods. Section 52(1) of that Act says that limitation period for an arbitral claim is the same limitation period as for an action. So presumably, sections 11 and 23 should apply to arbitral claims.  Section 47of the Arbitration Act, 1991 establishes a 30 day period for commencing an appeal from an award or an application to set aside an award. Section 52(3) establishes a 2 year period for enforcing an award. Section 3 says that the contracting parties may agree to vary or exclude any provision of the Act, except certain specific mandatory sections.  Sections 47, 52 and 53 are not among the mandatory sections.  So the parties should be able to vary the limitation periods set forth in those sections.

Article 34(3) of the Model Law attached to the Ontario International Commercial Arbitration Act (“ICAA”) establishes a three month period for bringing an application to set aside an international commercial arbitral award.  Article 52(3) establishes a two year limitation period for commencing an application to enforce the award. The ICAA and the Model Law do not contain any express power to grant relief from, or contract out of, those articles.  While the two year enforcement period seems to be based on the two year general limitation period in the Limitations Act, it appears that the parties can vary the latter but not the former, unless a court were to find that parties can generally contract out of the ICAA .

Third –  two warnings:

First, the mediation agreement should be carefully documented. An exchange of correspondence should not be relied upon as that exchange may be subject to dispute and interpretation.  The dispute or disputes that fall within the mediation agreement should be specified. In the present case, Sandro was fortunate that the exchange of correspondence was interpreted by the Court to include all the issues between all the parties.

Second, in a construction lien action, attention should be paid to intersecting limitation and procedural periods, some of which may not be suspended by a mediation agreement. The same warning applies to any action or arbitration involving statutory limitation periods or periods for taking steps which could result in the proceeding being dismissed if not taken. In the present case, Sandro may have thought that the mediation agreement suspended all periods for taking procedural steps.  But it didn’t. It didn’t suspend the two year period for setting the lien action down for trial.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 6, introduction, and Chapter 10, part 6.

Tribury v. Sandro, 2013 ONSC 658

Construction Law  –   Building Contracts   –   Construction and Builders Liens  – Arbitration  –  Mediation  –  Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                     February 24, 2013