Liens v. Trust Claims: SCC Says Filing a Lien Bond Does Not Preclude Trust Remedy in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel
September 21, 2015
By John O'Dea, Partner at McInnes Cooper,
Harvey Morrison, Partner at McInnes Cooper,
John Kulik, Partner at McInnes Cooper,
Matthew Hayes, Client Sector Lead Partner, Construction & Real Property Development at McInnes Cooper
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On September 18, 2015 the Supreme Court of Canada confirmed, in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, that subcontractors have two separate and distinct rights under the Manitoba Builder’s Lien Act: (1) to file a lien claim against the land; and/or (2) to make a statutory construction trust claim. The filing of a lien bond will not protect a contractor or owner from a trust claim. The SCC indicated that although claimants are not entitled to receive double-payment, contractors can end up facing both lien and trust claims at the same time, depending on the type of security a contractor chooses to post. Every Canadian province has legislation dealing with construction liens (also known as builders’ or mechanics’ liens); since this decision is based on the language of the Manitoba Act, its impact will vary depending on the language of the relevant legislation.
Dominion was the general contractor and Structal was its steel subcontractor. About 1½ years into their contract, Structal registered a builder’s lien under the Act against the project property, which included a large delay claim that greatly exceeded the amount Dominion would otherwise owe Structal under its subcontract. Dominion filed a lien bond in the full amount of the lien with the Manitoba court and Structal’s lien was vacated. Dominion continued to receive progress payment from the project owner. Structal said Dominion was still required to comply with the trust provisions under the Act, but Dominion but refused to make further payments to Structal saying: (1) it had a set-off against the funds Structal claimed; (2) there was no breach of trust; and (3) Structal was fully secured by the lien bond. At Structal’s request, the owner withheld a $3.5M payment from Dominion. (We note it is unlikely the owner had the right to do so: contractors have the right to contest subcontractor claims without interference from the owner. There can be no breach of trust claim until funds from the owner reach the contractor’s hands, at which point the subcontractor’s remedy is to sue the contractor and, potentially, the contractor’s principals personally). However, Dominion did not challenge the owner’s actions: instead, Dominion applied to the court for a declaration that its lien bond satisfied its trust obligations to Structal. Based on the language of the Manitoba Act, the SCC disagreed.
Separate & Distinct Statutory Remedies. The trust provisions and the lien provisions of the Manitoba Act are two separate, distinct and independent remedies; the claimant has access to both and can pursue them concurrently.
Lien Bond Doesn’t Affect Trust Remedy. The filing of a lien bond does not extinguish the trustee’s statutory trust obligations. The language of the Act is clear: payment of money or security into court takes the place of the land as the lien claimant’s security and a lien bond secures a lien claim, rather than satisfying it by paying it.
No Double Payment. The owner, contractor or subcontractor will never be required to pay the claimant twice for the same work if it complies with the relevant lien act provisions: payment under the trust reduces the amount of the lien claim by an equivalent amount to the extent they are for the same obligation. Because a lien bond only takes the place of the land in providing security for a lien holder, it does not provide security for trust obligations. When a lien bond is posted, the owner or contractor must also maintain amounts received for the project as trust funds. Consequently, there may be double security: the lien bond and the trust funds. The posting of a lien bond does not reduce amounts to be held in trust. By paying cash into court to vacate a lien instead of a lien bond, a contractor can avoid the problem of double security. The payment of cash (that is, trust funds) into court is not regarded as an unlawful appropriation or conversion of trusts funds, but as complying with the legislation.
Read the SCC’s decision in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, 2015 SCC 43 here.
The impact of this decision will vary in each Province across Canada depending upon whether the relevant builder’s lien / mechanics’ lien legislation contains trust provisions and the language. In Atlantic Canada, neither PEI nor NL has construction trust legislation, so the decision does not have any impact there. However, both the NB and the NS legislation contain trust provisions. The key to determining this impact lies in the language of the provisions dealing with posting security to remove the lien, not the language of the trust provisions. The Manitoba Act (section 56(1)) says:
Any money paid into court or any security given under subsection 55(2) stands in place of the land against which the lien was registered and is subject to the claims of …
NB. New Brunswick’s Mechanics’ Lien Act, like the Manitoba legislation, contains trust provisions imposing a trust on all funds a builder, contractor or sub-contractor receives under any contract in the construction pyramid for the benefit of those who’ve worked on or supplied materials to the project. These trust provisions are “stand-alone”: the right to the lien on the trust monies and that on the land are “completely independent” and a claimant can invoke and enforce the trust provisions even if there’s no lien against the land. The NB Act (section 51(3)(a)) says:
Money paid into court or any security given in an action, takes the place of the land against which the claim of lien was filed …
The language of the NB Act is substantially similar to that of the Manitoba Act: therefore, it is clear that the NB courts will reach the same conclusion as did the SCC: the filing of a lien bond does not extinguish the trustee’s statutory trust obligations – so a contractor or owner that chooses to pay security into court to vacate a lien claim must still deal with trust claims.
NS. Similarly, the Nova Scotia Builders’ Lien Act contains trust provisions deeming any funds received by an owner of a construction project for the financing of it or by a contractor for payment of work performed on it to be “trust funds” for those contractors and suppliers directly below the owner and/or contractor in the “construction pyramid”. But the language of the provisions dealing with posting security to remove the lien in the NS Act (section 29(4)) is different from that of the Manitoba or the NB Acts:
Upon application, the court or judge having jurisdiction to try an action to realize a lien, may allow security for or payment into court of the amount of the claim, and may thereupon order that the registration of the lien be vacated or may vacate the registration upon any other proper ground and a certificate of the order may be registered.
Although this language is not as comprehensive as that of the Manitoba and NB Acts, the NS courts have interpreted and applied section 29(4) to give it essentially the same effect as the Manitoba legislation. There is no suggestion in the NS legislation that the provision of security to obtain an order vacating the registration of a lien affects trust clams. And while not certain, it is likely the NS courts will apply the principles in the SCC’s decision and the outcome in NS would be similar to that in Manitoba.
Atlantic Canada Comparison. To see a comparison of the key builder’s lien legislation provisions across Atlantic Canada, read our Atlantic Canada Construction Lien Legislation Chart.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Construction Law Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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