We udpated this publication on March 7, 2022.

The New Brunswick Construction Remedies Act, substantially came into effect on November 1, 2021. The Act will come into full effect on April 1, 2022 when the holdback trust account provisions come into force. The new Act has replaced New Brunswick’s Mechanics’ Lien Act, both clarifying and expanding the rights – and the responsibilities – of owners, engineers, architects, contractors, and effectively every stakeholder, including the financial institutions with which they do business, involved in construction contracts in New Brunswick. Construction industry stakeholders are wise to begin to review, and to revise, their standard practices, processes, agreements, forms, and supplementary conditions now to ensure they are in compliance with the Construction Remedies Act (CRA). Here are seven of the key changes the CRA has made to New Brunswick’s builders’ lien regime.

1. New Owner’s Trust

Owners are most affected by the trust changes under the CRA.

Owner’s Trust. While contractors and sub-contractors were always subject to trust provisions under the Mechanics’ Lien Act, and continue to be under the CRA, completely new to the CRA is the owner’s trust. Under the CRA, an owner’s trust fund is created to the benefit of all contractors, sub-contractors, suppliers, and others that have supplied services or materials for an improvement. The owner’s trust fund consist of:

• Funds advanced to the owner to finance the improvement.
• Any amount that becomes due to a contractor pursuant to a contract for the improvement.
• The amount of the unpaid contract price that is in the owner’s control when substantial performance of a contract has been certified.
• Proceeds from the sale of the land.
• Amounts received from an insurance policy covering the improvement.

Under the CRA, owners, as well as contractors and sub-contractors, must take care not to misappropriate trust funds intended for a specific project, or risk liability for breach of trust. This will require owners to put in place the necessary checks and balances to ensure they appropriately administer the trust funds.

Permitted Uses. However, the CRA also provides for specific permitted uses of owner, contractor, and subcontractor trust funds. For example, if the owner takes out a loan to pay for services, it can apply trust funds equal to the amount of that loan to repay it.

Breach of Trust. Breach of trust by an owner, contractor, or sub-contractor is a provincial offence punishable by a fine of up to $10,200, with the possibility of imprisonment for repeated offences. Directors and officers who acquiesce to a corporation committing a trust offence can also be personally liable for the offence.

2. New Lien Deadlines

The CRA changes the timing in which lien rights arise – and expire. For owners, the changes will affect when the risk of a lien exists, and how to respond to avoid business interruption. For contractors, sub-contractors, engineers, architects, suppliers, and others providing materials or services, lien deadlines are strictly enforced; the changes will affect their access to the protection of a lien.

Standard Registration Deadline. Under the Mechanics’ Lien Act, the timeframe allowed to register a claim for lien varies depending on the service provided. The CRA standardizes the time for registering a claim for lien to 60 days from the earlier of: the date of completion of the contract or subcontract, the date services were last provided, or the date a certificate of substantial performance is issued. In addition, contractors, subcontractors, and workers each have a separate list of events that start the 60-day timer to register a lien.

New “Substantial Performance” Definition. The CRA is more definitive about what constitutes “substantial performance”.  Unlike the Mechanics’ Lien Act, under the CRA, a contract is substantially performed when the improvement under the contract is ready for use or is being used for the purposes intended and when the improvement is capable of completion within a specified amount. The CRA also specifies that a contract is completed when the cost of completing it is not more than 1% of the contract price.

Time to Perfect. The time for perfecting a claim for lien continues to be 90 days from the date of registering the claim for lien. To perfect a claim for lien, a lien claimant must commence an action to enforce the lien with the court and register a certificate of pending litigation against the land subject to the lien. Similar to the Mechanics’ Lien Act, an action to enforce a lien must be set down for trial within one year of commencing the action, unless the court grants a request for an extension.

3. New Holdback Requirements

The most significant change to holdback requirements in the CRA stems from the requirement for owners to establish holdback trust accounts – a requirement that will take effect on April 1, 2022.

Owner Holdback Trust Account. Under the CRA, an owner is required to open a holdback account with a financial institution and retain the holdback funds in that account. Where there’s one contract for improvement between the owner and a contractor, the owner and the contractor must jointly administer the holdback trust account. Where there’s more than one contract for the improvement, the owner must establish a single holdback trust account administered jointly between the owner and one of the following – each of which must also be familiar with their new obligations under the CRA:

• One of the contractors.
• A lawyer.
• An architect or engineer.
• A chartered professional accountant.
• A trust company.

Based on feedback on the CRA during the public consultation process, the owner holdback trust account provisions of the CRA originally proposed were amended to allow a single holdback trust account for owners undertaking more than one improvement on a single industrial facility. This industrial facility exemption includes a facility on a single or integrated site that is engaged in manufacturing, processing, mining, quarrying, oil and gas extraction, or electricity generation. This exemption allows owners of industrial facilities to reduce the amount of individual holdback trust accounts required when multiple improvements are occurring at the same facility. In such a case the CRA requires that the single holdback trust account be administered jointly between the owner and one of the trustees listed above.

Holdback Amount. The CRA requires a 10% holdback on the contract price. The owner must retain the holdback funds until 60 days after the date the certificate of substantial performance is signed or the declaration of substantial performance is made. The CRA will allow for payment of holdback on an annual or phased basis – but only if certain prerequisites are met, including a contract price of at least $10M, and an explicit contractual term allowing for annual or phased holdback payment. Owners & contractors are wise to review and, if necessary, revise their standard form contracts to include annual or phased holdback payment if this is an option they want under the CRA.

Administration. Practically, owners – and their financial institutions – must be ready for the increased administrative effort the new holdback account requirements will entail. Owners will be approaching banks to open many holdback trust accounts, one for each construction project an owner undertakes at each different site. Some large owners will have dozens of holdback trust accounts for various projects, each with their own set of trustees. Owners will need to put the resources and processes in place to administer the accounts. Financial institutions must be ready to address the trustee requirements and the inevitable disputes that will arise from administering this new type of trust account.

4. Applicable to the Crown

Different again from the Mechanics’ Lien Act, the CRA applies to the Crown and local governments. However, many of the CRA’s requirements apply differently to the Crown and local governments than to typical owners. For example, a lien doesn’t attach to Crown or local government owned land; instead, the lien attaches as a charge on the holdback retained by the Crown or local government. Additionally, the owner holdback trust account requirements don’t apply to the Crown or local government; they need merely retain the holdback.

5. No Contracting Out

The CRA doesn’t allow for contracting out, and specifically provides that any waiver or release of any rights, benefits, or protections provided under the CRA is void. This broad application provides contractors and suppliers with better protections, while leaving owners with less flexibility in managing their large infrastructure projects.

6. New Prescribed Forms

Other administrative changes to take effect with the coming into force of the CRA are new, updated and modified standard forms.  Standard forms are available within the Regulations.

7. Transition Period

Many construction stakeholders will be required to simultaneously administer liens under both the Mechanics’ Lien Act and the CRA regimes during a transition period. The CRA applies to all construction contracts entered into on or after  November 1, 2021. However, the Mechanics’ Lien Act will continue to apply to:

• Contracts entered into before the CRA’s effective date.
• Contracts entered into before, but amended after, the CRA takes effect.
• Sub-contracts and the supply of services or materials under a contract or sub-contract entered into before the CRA takes effect.

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Please contact your McInnes Cooper lawyer or any member of our Construction Law Team @ McInnes Cooper to discuss how we can help you comply with the N.B. Construction Remedies Act.