Trust Fund Obligations Continue After A Lien Bond Is Filed: Supreme Court Of Canada

The Supreme Court of Canada recently released its highly anticipated decision in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel. The court has held that the trust fund obligations on a construction project did not terminate when the contractor filed a bond in respect of the subcontractor’s lien.

This decision is of fundamental importance to building contracts and construction projects. It means that, even after posting a bond for a subcontractor’s or supplier’s goods and services, an owner and contractor must continue to hold and pay funds due in respect of the construction project to those who are entitled to those funds down the payment chain. They cannot rely upon the bond as discharging that obligation.

Those sympathetic with the contractor’s position may assert that piling the trust fund obligation onto the owner or contractor once a lien bond has been filed is burdensome and unfair. However, the Supreme Court held that enforcing trust fund obligations in addition to the lien rights fortifies and strengthens the whole statutory regime.

Background

Stuart Olson Dominion Construction Ltd. (then known as Dominion Construction, and referred to herein and in the judgment as Dominion) was the general contractor for the construction of a new football stadium for the University of Manitoba. Structal was its structural steel subcontractor. Structal filed a builder’s lien against the property. Dominion filed a lien bond for the amount of Structal’s lien claim. Structal approved the bond and vacated its lien. Dominion continued to receive progress payments from the Owner. Structal asserted that Dominion was still required to comply with the trust provisions of the Act even though a bond had been provided for its lien. Dominion refused to make further payments to Structal and maintained that it had a set-off against the monies claimed by Structal, that there was no breach of trust, and that Structal was fully secured by the lien bond.

Structal notified the owner that it should withhold a $3.5 million payment from Dominion or it would bring a claim against if for violation of the trust provision of the Act. The owner then required Dominion to bring an application in the Manitoba Court of Queen’s Bench seeking a declaration that it had satisfied its trust obligations to Structal. If that order had been granted, then the owner could have used those withheld monies to pay other trust claimants and then other creditors. Structal then filed its own motion requiring full payment of its past-due invoices, without deduction or set-off, upon Dominion receiving the funds from the Owner.

The motion judge held that the filing of the lien bond extinguished the trust obligations of Dominion under the Manitoba Builders’ Liens Act (the Act or BLA). The Court of Appeal reversed this decision, holding that the subcontractor’s right to enforce a statutory trust was entirely separate from its right to file a lien claim, and that the subcontractor was entitled to enforce both rights even though a lien bond had been provided to secure the lien claim.

Decision of the Supreme Court of Canada

The Supreme Court recognized that there were two preoccupations of the construction industry at stake in this case:

First, ensuring payment of contractors and subcontractors; and

Second, encouraging liquidity in the flow of funds during the job.

The question in the present case was whether protecting the first preoccupation, by enforcing the trust claim, would interfere with or jeopardize the second, the flow of funds during the project. The Supreme Court found no such interference or jeopardy. Indeed it found that enforcing the trust fund provisions in this situation would enhance, while not enforcing whose provisions would undermine, the purpose of the statute:

“The purpose of the statutory trust was articulated by the Manitoba Court of Appeal in Provincial Drywall: “The trust provisions are designed to help assure that money payable by owners, contractors and subcontractors flows in a manner which is in accord with the contractual rights of those engaged in a building project and it is not diverted out of the proper pipeline”……Finding that a trust claim is extinguished by filing a lien bond would undermine this purpose. A lien bond merely secures a contractor’s or subcontractor’s lien claim rather than satisfying it through payment and it does not extinguish the owner’s or contractor’s obligations under the statutory trust. The filing of a lien bond has no effect on the existence and application of the trust remedy.” (paras. 40-41)

The court noted that this conclusion is consistent with the word “all” which is used twice in section 4(3) of the Act. That subsection requires that the contractor not divert trust funds for its own use until all subcontractors have been paid all amounts owing to them.

The court noted that in Manitoba, the trust provisions were formerly contained in The Builders and Workers Act, while the lien provisions were found in The Mechanics’ Liens Act. In the statutes of Manitoba 1980-81, the two statues were repealed and incorporated into the Act. But, as the court said, “the legislature did not expressly delineate how the lien and trust provisions were to interact in situations such as this case, where both remedies are pursued at the same time by a contractor or subcontractor.” Accordingly, while Dominion submitted that the trust fund provision was a secondary mechanism designed to protect lien rights and provided no wider protection, the court found no basis for that submissions: “The trust remedy originated in a statute that did not provide a lien mechanism and it was not altered to limit its applicability when both were incorporated into the BLA. Rather, both remedies exist independently.” (para. 35)

The court also noted that the two provisions contain different rights and affect different persons:

“The lien provisions do not impose obligations on contractors or subcontractors with respect to funds received. Trust funds, on the other hand, cannot be appropriated for other purposes until all subcontractors, all persons who have supplied materials or services have been paid (s. 4(3)(a)). Moreover, pursuant to s. 16 no lien can encumber the interest of the Crown, a Crown agency, or a municipality. There is no similar exclusion with respect to the trust provisions of the Act (see s. 3(1)).” (para. 32)

The court accordingly concluded:

“Nothing in the BLA suggests that the lien and trust provisions do not remain as two separate remedies. This is not to deny that a contractor or subcontractor may have both a lien and trust claim and that the funds sought under each remedy may be the same. But this does not change the fact that the claimant has access to both of these remedies.” (para. 38)

The court then addressed Dominion’s submission that the filing of the lien bond terminated the subcontractor’s trust fund rights. It rejected that submission for two reasons.

First, it held that if Dominion’s submission were correct, then if the subcontractor’s lien action failed (because, for instance, it had filed the lien claim late), then the subcontractor would also lose its trust fund rights. That result was clearly not envisaged by the legislation which contemplates that the two remedies may be independently asserted.

Second, the court rejected Dominion’s submission that maintaining the separate enforceability of the trust fund and lien claims would result in double payment of the subcontractor when the owner provides a lien bond and also has trust funds or is receiving trust funds from the owner. It did so by making two points.

First, a lien bond is not payment to the subcontractor, but only a promise of payment by the bonding company if the subcontractor succeeds in its lien action.

Second, the decision to obtain a lien bond, rather than pay the trust monies into court, is one for the contractor or owner to make. While that choice may result in double security, it does not result in double payment:

“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……..So long as the trust funds themselves are deposited with the court, the funds are secure and the trust has not been breached….A lien bond involves only an assurance that the surety will pay the amount of any lien judgment should the lien defendant fail to do so. The bond does not constitute security for the trust claim and does not result in the protection of the actual trust monies at issue. An owner, contractor, or subcontractor 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.” (paras. 46-47)

The court concluded with the observation that:

“Dominion chose to provide security by way of a lien bond rather than payment of funds into court. It is true that it paid premiums for that bond which are not recoverable, but that is simply the cost of the security which it chose to provide. Structal will not receive double payment.” (para. 49)

Discussion

There are many interesting points to discuss about this decision, but here are a few:

  1. It is important to remember that, assuming that the owner pays the monies on the project in accordance with its statutory obligations, the owner will only be liable for the holdback. In Manitoba, the owner’s holdback is 7.5 percent of the monies due under the main contract, and in Ontario and most other provinces the holdback is 10 percent. So normally, by its lien the subcontractor is seeking to protect its right to that holdback in the owner’s hands. However, the trust provisions apply to any monies due on the project up and down the pipeline of payment. So if the contractor’s position had been upheld, that would have dramatically limited the trust fund rights of subcontractors, sub-subcontractors and suppliers.
  1. In some provinces, such as Alberta and Ontario, the subcontractors all share in the monies paid into court or protected by security such as a lien bond, even if those monies or that security are initially paid or provided to take one particular lien off the title to the property. In Saskatchewan, it is only the lien claimant whose lien is discharged by payment into court or by provision of security who is entitled to the money in court or other security, and in Manitoba, New Brunswick and Prince Edward island the lienholder whose lien is discharged by the payment into court or provision of other security has a first charge on those monies or security. So, the argument that a lien bond is not payment, and far from it, is even stronger in the former provinces than the latter.
  1. The Supreme Court noted that, In Manitoba the lien provision and the trust fund were in different statutes as recently as 1981. In other provinces, such as Ontario, the lien and the trust fund provisions have been in the same lien statute for a long time. The Supreme Court noted that the legislative history in Manitoba supported its conclusion that the lien rights and trust fund rights are entirely separate, and that accordingly the trust fund rights are not eliminated by the provision of a lien bond. However, it seems unlikely that this distinction will make any difference in interpreting these lien statutes. The reasoning of the Supreme Court about the distinction between lien rights and trust fund rights appears to apply to all those provincial statutes.
  1. Trust fund rights start at different levels in different provincial statutes. In some provinces, they start at the owner’s level. Thus, in Manitoba, monies received by the owner that are to be used in the financing of the improvement, or are in the hands of the owner and payable to a contractor on the basis of a certificate of a payment certifier, are trust funds. In Ontario, the trust fund remedy was first introduced at the contractor level in 1942, and expanded to the owner level in 1969. The regime in Nova Scotia and Saskatchewan is similar to the present regime In Manitoba and Ontario. In other provinces, such as Alberta, the trust fund starts at the contractor level, and it is monies received by the contractor after a certificate of substantial completion has been issued that are trust funds for the benefit of persons who have performed work or provided services on the project. This difference may have been very material in the present case. If the trust fund obligation only commenced if and when the monies were paid to the contractor Dominion, then Structal may have had no right to give notice to the owner and demand that the trust fund rights be adhered to at that level. If that is so, then there may be “leakage” in the payment pipeline at the owner’s level in some provinces that this decision will not address. One wonders whether, in those provinces where the trust fund remedy starts at the contractor level, the legislation should be amended to move that remedy to the owner level for the sake of consistency across Canada and to ensure that the payment pipeline applies to all levels of the project.
  1. An underlying but unstated issue in this case was whether the imposition of the subcontractor’s trust fund rights, in addition to its lien rights against the land or the lien bond, would be unfair, or commercially unreasonable by interfering with the flow of funds during the construction project. In the absence of proof of those sort of circumstances, the wording of the statute showed that the subcontractor was entitled to assert both rights. The owner and contractor were not able to show such unfairness or commercial unreasonableness. On the face of the court’s judgment, there is nothing to indicate that they sought to show that the flow of funds would be interfered with or jeopardized; and the court found that the monies due under the main contract could be paid into court so that no double payment would occur. The court was not impressed by any unfairness arising from paying a premium for the lien bond rather than paying the money into court. That was simply a business, cash flow and financing decision for the contractor. In the result, there was no commercial unreasonableness to the subcontractor’s assertion and, in the court’s view, much to support it in terms of keeping the monies due on the project in the payment pipeline.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 16, parts 4(m) and 6.

Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, 2015 SCC 43

Construction and builders’ liens – trust fund provisions – lien bonds

Thomas G. Heintzman O.C., Q.C., FCIArb                                   September 28, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

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.

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

 

 

Does A Construction Lien Bond Satisfy A Trust Fund Claim?

There are several different remedies provided in construction and builders lien legislation that do not necessarily fit together well. Two remedies available to a subcontractor are the lien claim against the land and the trust fund claim against funds received or receivable by a contractor.

In the case of a lien claim, the payment of money into court or the provision of a bond discharges the lien against the land. But does it discharge the trust fund claim?  If it doesn’t, does that mean that a subcontractor can pursue a trust fund claim, so that it gets paid through that remedy while at the same time the monies remain in court or the lien bond remains in place? And if the subcontractor can do that, how does that affect the contractor’s counterclaim and set off for delay? Through its trust fund claim can the subcontractor force the owner to pay the full amount of the subcontractor’s claim before the trial of the contractor’s delay claim?

These were the issues addressed in the recent decision of the Manitoba Court of Queen’s Bench in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel.

The Background

In December 2010 Stuart Olson entered into a contract with the owner BB Stadium Inc. for the construction of a new stadium in Winnipeg.  In April 2011, Stuart Olson entered into a subcontract with Structal for the structural steel and other facilities.  The deadlines in the subcontract were not met and the opening of the stadium was delayed for a year.

Claims and counterclaims were asserted between Stuart Olson and Structal.  Structal claimed over $8 million due to work scope changes and other factors. Stuart Olson asserted a delay claim against Structal in an amount over $9 million.

In September 2012, Structal demanded payment from Stuart Olson for its outstanding invoices in the amount of about $4.2 million.  Structal also asserted that the monies due to Stuart Olson from the owner were impressed with a trust fund claim in Stuructal’s favour and that Stuart Olson must use those monies to pay subcontractors and not itself.  Structal also filed a  lien against the land in the amount of about $15 million.

In October, 2012, Stuart Olson obtained a lien bond, approved by Structal, for the full amount of the lien on payment of a premium of $159,003.07 per year, and Structal discharged its lien against the land.

Structal continued to demand that Stuart Olson pay its outstanding invoices and claimed that the monies receivable by Stuart Olson from the owner were impressed with a trust in Structal’s favour.  Stuart Olson continued to maintain that it had a set-off against any claim asserted by Structal and maintained that Structal’s claim, whether in a trust fund form or otherwise, was fully secured by the lien bond that had been filed.

Structal then asked the owner to withhold funds from Stuart Olson failing which it would sue the owner under the trust provisions of the Manitoba Builders’ Liens Act. (the “Act”).   In response, Stuart Olson commenced an application to determine the legal position.

In the meantime, Stuart Olson commenced an action against Structal asserting its delay claim.

A certificate of substantial completion had been issued relating to the subcontract with Structal.  There were no lien or trust fund claimants other than Structal. There are no deficiencies in the work done by Structal and the owner was ready to make the remaining payment to Stuart Olson which had not paid because of Structal’s threat.  The real and remaining issue was the delay claim by Stuart Olson against Structal which would be dealt with in the separate action.

The Decision

The application judge held that the posting of the lien bond exhausted the contractor’s trust fund obligations in the particular circumstances of this case.

First, the judge held that prior judicial authority in Manitoba supported the principle that the filing of a lien bond discharges any trust fund obligations of the contractor.

Second, he held that prior judicial authority also supported the proposition that a set-off could apply to, and reduce, a trust fund claim.

Third, he held that it would be unfair to determine, at this stage, whether Stuart Olsson had or didn’t have a right of set-off. So the present issue could not be decided on the basis that Stuart Olson had no rights of set-off. It would not be fair to order payment of the trust funds to Sturctal in the presence of the delay claim by Stuart Olson.

In all the circumstances, the judge held that the filing of the lien bond by Stuart Olson satisfied its trust fund obligations and that upon receipt of the progress payments from the owner, Stuart Olson could disburse those funds without being in breach of the trust fund obligations under the Act.

Discussion

Assuming that the contractor, Stuart Olson, was financially capable of paying the future lien bond premiums, this decision makes eminent business sense. But it does raise some practical concerns. What if Stuart Olson could not or did not pay the future premiums? Would the bond have remained in place? What protection for the subcontractor would there have been in this eventuality?

What if other subcontractors had liens or trust fund claims? In some provinces, a lienholder must share with other lienholders the amount of a lien bond posted to satisfy its lien.  In these circumstances, a lien bond may be an uncertain source of funds for a trust fund claim.  And why shouldn’t the remaining payments by the owner be paid into court, with the amount of the lien bond being reduced accordingly? Wouldn’t that be a better way of resolving the conflict between the purpose of a lien and the purpose of a trust fund claim?  Since the contractor had no other subcontractors or suppliers to pay, the real question was: whose litigation claim should be financed through the lien bond: the contractor’s delay claim or the subcontractor’s claim to payment under the subcontract? An argument could be made that the purpose of the Act is to give priority to the subcontractor’s claim for payment. If that is so, then that result could be achieved by paying the remaining monies due by the owner into court and reducing the amount of the lien bond.

The present decision highlights the different wording in the different provincial lien statutes. In Manitoba, sub-section 5(3) allows the owner to retain trust funds if “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.  These words seem to contemplate a lien bond and may envisage that if a lien bond is in place then the owner, contractor or subcontractor can make payments from trust funds. In contrast, sub-sections 7(4), 8(2) and 9(2) of the Ontario Act state that the trust is in place until the contractors or subcontractors “are paid.”  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.   No specific provision for setoff is made in the trust fund sections of the Manitoba Act. The judge did not comment on the presence or absence of these provisions in the Manitoba Act. It certainly seems odd that the trust fund sections of the provincial Acts do not specifically deal with the impact of lien bonds and other forms of security for the lien upon trust fund claims.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 11, parts 2(g) and 3.

 Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, 2013 MBQB 48

Construction and builders liens   –   trust funds   –   discharging liens   –   lien bonds

Thomas G. Heintzman O.C., Q.C., FCIArb                                              August 26, 2013

www.heintzmanadr.com

www.constructionlawcanada.com