Canadian Underwriter

Lien bonds, building contractors’ trust funds are two separate remedies in Manitoba: Supreme Court of Canada

September 18, 2015   by Canadian Underwriter

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Under Manitoba’s Builders’ Liens Act, a construction contractor could access both a lien bond and a trust claim if there is a dispute over payment because a firm could have a trust claim independent of a lien claim, the Supreme Court of Canada suggested in a ruling released Friday.

Canada’s highest court ruled against general contractor Stuart Olson Dominion Construction Ltd., over a dispute with subcontractor Structal Heavy Steel, involving payments during the construction of the Winnipeg Blue Bombers’ football stadium at the University of Manitoba.

“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,” Mr. Justice Marshall Rothstein wrote on behalf of the Supreme Court of Canada. “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.” 

The Supreme Court of Canada ruled against Stuart Olson Dominion Construction Ltd., over a dispute with Structal Heavy Steel, involving construction of the Winnipeg Blue Bombers’ football stadium.

Court records indicate that in 2010, Stuart Olson Dominion entered into a $171.8-million contract to build the stadium, known as Investors Group Field, which can accommodate up to 40,000 people.

The following April, Stuart Olson Dominion awarded a $44.4-million contract to Structal, which included installing structural steel and a roof. Structal did not meet its deadlines.

In June, 2012, Structal wrote to Stuart Olson Dominion “asserting that it had experienced extensive added costs because of ‘work scopes, circumstances, conditions and events outside of [its] contract scope, and/or not within [its] control’, and that it would seek ‘an equitable contract adjustment in both time and money,'” wrote Mr. Justice Perry Schulman, of the Court of Queen’s Bench of Manitoba, in a decision released Feb. 28, 2013. “In July, [Stuart Olson Dominion] replied that it holds Structal responsible for failure to meet the deadlines and that it intended to seek recovery from Structal of its added costs and expenses.”

Then in September, Structal filed a lien against title to the stadium for $15.57 million. That included two unpaid invoices (worth a combined total of about $4 million), plus statutory holdback of $3.31 million and a delay claim of $8 million.

The province’s Builders’ Liens Act creates statutory trusts and rights to file liens against title. It stipulates that “all sums … received by a contractor on account of a contract price constitute a trust fund” both for the benefit of sub-contractors and for the benefit of project owners for any set-off or counterclaim relating to performance of the contract.

Contractors are trustees of their trust funds and they are not allowed to appropriate or convert any part of the trust funds either for their own use – or for any use not authorized by the trust – until “all sub-contractors who have entered into a sub-contract … have been paid all amounts then owing to them out of the sum received.”

Also under the Builders’ Liens Act, contractors and suppliers have a lien on the land or structure “for the value of the work, services or materials which … attaches upon the estate or interest of the owner in the land or structure upon or in respect of which the work was done or the services were provided or the materials were supplied, and the land occupied thereby or enjoyed therewith.”

In October 2012, Stuart Olson Dominion deposited a lien bond, for the $15.57 million that Structal was demanding, with the Court of Queen’s Bench. That bond stipulated that if Stuart Olson Dominion were to “fail to satisfy any judgment for lien in favour of [Structal], the Surety [under the bond] shall forthwith pay … the amount of any such judgment not exceeding the amount of this bond.”

Stuart Olson Dominion asked the Manitoba Court of Queen’s Bench for an order declaring that those funds “are not subject to a trust and that on receipt of the progress payment it is free to make use of the proceeds of the payment without being in breach of trust.”

Structal asked for an order “requiring Dominion to pay Structal all of the monies Structal asserted were owing under its subcontract, including the statutory holdback, without deduction or set-off, immediately upon receipt of such monies from the Stadium owner.”

In 2013, Justice Schulman found that that by filing its lien bond, Stuart Olson Dominion did satisfy its trust obligations to Structal. Justice Schulman also ruled that, upon receipt of the progress payments from the project owner, Stuart Olson Dominion is allowed to make payments to sub-contractors other than Structal without being in breach of the trust provisions of the Builders’ Liens Act.

But the Manitoba Court of Appeal disagreed, ruling in 2014 that even though it filed a lien bond, Stuart Olson Dominion had not exhausted all of its obligations under the trust provisions of the Builders’ Liens Act.

Stuart Olson Dominion unsuccessfully appealed to Canada’s highest court.

“Nothing in the [Builders’ Liens Act] suggests that the lien and trust provisions do not remain as two separate remedies,” Justice Rothstein wrote in the unanimous Supreme Court of Canada decision released Sept. 18, 2015. “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.”

Canada’s highest court suggested that a lien bond “provides no more security than the lien which it displaced: the lien claimant must be successful in the lien action in order to collect the amount secured by the lien bond.”

If a court were find that a lien is invalid under the Builders’ Liens Act, then that lien would be extinguished, Justice Rothstein suggested.

“The claimant would then find itself with no access to the funds guaranteed by the bond,” Justice Rothstein added. “Nonetheless, a contractor or subcontractor may still have a trust claim independent of the lien claim; the lien bond would not have secured this trust claim. If Dominion were correct that the mere filing of the lien bond extinguished a contractor’s or owner’s trust obligations, enabling the owner or contractor to appropriate the trust funds for his or her own use, the claimant would be left with no lien claim and no trust monies if the lien claim failed. Such interruption of the flow of funds down the so-called construction pyramid, from the owner to the contractor, to each subcontractor and supplier, is the very problem that the trust provisions were designed to address.”

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