Friday, 24 August 2018

Statutory Trust for the Benefit of Subcontractors

By Corbin Devlin


A lesser known provision of the Alberta Builders’ Lien Act creates a trust fund in favour of subcontractors. 

Narrow Provisions
These statutory trust provisions are narrow in their operation. They only apply when “a certificate of substantial performance is issued” and they only apply to payments made by the owner after the date the certificate is issued. But in certain circumstances they can provide a financial safety net for subcontractors.
 
The certificate of substantial performance is mainly used to obtain progressive release of the holdback funds (a topic we have discussed extensively in prior blog posts). Up to the date of substantial performance, the holdback funds are held by the owner to ensure that the subcontractors will be paid, and to satisfy the owner’s statutory obligations should a lien be filed. Section 22 of the Builders’ Lien Act provides that a payment made by the owner after a certificate of substantial performance is issued is a trust fund “to the extent that the person owes money to persons who provided work or furnished materials” within the scope of the certificate. This is intended to ensure that when the holdback funds are paid out, they will end up in the hands of any unpaid subcontractors. Section 22 effectively uses the mechanism of a trust to avoid the diversion of the holdback funds, after the issue of the certificate of substantial completion, but before the funds actually reach the unpaid subcontractors. (Reference: Iona Contractors Ltd. v Guarantee Company of North America, 2015 ABCA 240 at para. 22. Click here for link

The Operation of the Trust
The benefit of the trust provisions (to subcontractors) is mainly realized in the context of an insolvency. If the general contractor becomes insolvent and uses monies received from the owner to pay other creditors, the unpaid subcontractors may have additional legal recourse for breach of trust. In the event of a priority dispute, subcontractors benefiting from the trust provisions may recover amounts due to them ahead of the general contractor’s secured creditors. And, the trust provisions may provide a supplemental remedy if the subcontractor’s lien rights prove inadequate (e.g. if money paid into court as alternate security for a claim of lien proves inadequate). (Reference: Crossing Company Inc. v. PricewaterhouseCoopers Inc., 2004 ABQB 448, Click here for link)

Finally, the trust provisions may provide subcontractors a measure of security even if the lands are exempt from liens (e.g. a public highway, federal lands) or the subcontractors do not have lien rights for some other reason (e.g. failure to register on time). 
 
A Few More Notes
The statutory trust provisions apply equally for the benefit of material suppliers.

These trust provisions vary significantly from one jurisdiction to another. In most Canadian provinces, the statutory trust provisions are actually much broader than they are in Alberta.

The complete text of s. 22 is as follows:

22(1)  Where
                (a)          a certificate of substantial performance is issued, and
                (b)          a payment is made by the owner after a certificate of substantial performance is issued
the person who receives the payment, to the extent that the person owes money to persons who provided work or furnished materials for the work or materials in respect of which the certificate was issued, holds that money in trust for the benefit of those persons.
 
(2)  When a person other than a person who received the payment referred to in subsection (1)
                (a)          is entitled to the money held in trust under this section, and
                (b)          receives payment pursuant to that trust,
the person, to the extent that the person owes money to other persons who provided work or furnished materials for the work or materials in respect of which the payment referred to in clause (b) was made, holds that money in trust for the benefit of those other persons.
 
(3)  A person who is subject to the obligations of a trust established under this section is released from any obligations of the trust when that person pays the money to
                (a)          the person for whom that person holds the money in trust, or
                (b)          another person for the purposes of having it paid to the person for whom the money is held in trust.

Builders’ Lien Act, RSA 2000, c. B-7

Wednesday, 11 April 2018

CSPs Clarified


One of the more common misconceptions regarding a Certificate of Substantial Completion (CSP) is that it triggers the deadline for lien registration.  In fact, the lien period is determined by the completion of services (or work, or supply of materials) for which a lien is claimed – or the abandonment of the contract in question – not the posting of a CSP.

Progressive Release of Holdback

Posting a Certificate of Substantial Completion certainly affects lien rights.  As discussed in a prior article, the statutory purpose a Certificate of Substantial Performance is to permit a progressive release of holdback.  A contractor or subcontractor may wish to issue a Certificate of Substantial Performance to obtain payment of its holdback, even though the work (or the overall project) will not be totally complete for some time. 

Posting a CSP creates two lien funds: a major lien fund and a minor lien fund.  (If there is no CSP posted, there is only one lien fund.)  The major lien fund consists of the holdback and any additional unpaid amounts up to the date of the CSP.  If there are no liens registered, the owner may safely release the major lien fund holdback (for the contract or subcontract that is substantially complete) 46 days after the CSP is posted.  The legislation does not require the owner to progressively release holdback, the legislation only permits it.  Prudent contractors and subcontractors will ensure that their contracts require the owner to progressively release holdbacks when permitted by the legislation.

Reduced Security

The minor lien fund consists of the holdback and any additional unpaid amounts for work performed after the date of the CSP.  If the owner is progressively releasing holdbacks, the minor lien fund is likely to be quite small relative to the overall project value.  The minor lien fund holdback may be released by the owner 46 days after total completion of the work, assuming no liens are registered.

The key for potential lien claimants is this: the owner’s liability for the major lien fund holdback expires 46 days after the CSP is posted, if no lien is registered: Chandos Construction Ltd v Twin Peaks Construction Ltd.  A lien claimant whose work continues after the CSP is posted may have the right to register a lien long after the CSP is posted (up to 45 days after the work is finally completed); however, the security given by that lien is much reduced 46 days after the CSP is posted.  In other words, the lien only “attaches” the minor lien fund, 46 days after the CSP is posted.  The potential lien claimant concerned with payment of the major lien fund holdback must register a lien within 45 days of the CSP to preserve the full security given by the Builders’ Lien Act

Posting on the Jobsite

The Builders Lien Act requires the CSP to be posted in a conspicuous pace (e.g. the project bulletin board) on the jobsite within 3 days of issuance.  This requirement is sometimes overlooked.  The case law shows that an owner needs not determine whether a CSP is properly posted before relying on the CSP to release the major lien fund: Owl Developments Ltd. v Alcantara.  The Act provides that the person who fails to post the CSP may be liable for legal costs and damages resulting from this non-compliance, although the right to recover costs and damage from the same party who failed to post the CSP in the first place may be a hollow remedy in the event of an insolvency. 

Disputing Substantial Performance

It is up to the party posting the CSP to determine if the work is substantially complete as defined in the legislation – unless the relevant contract says different.  Once posted, a CSP can be relied on by the owner and by potential lien claimants; it would create uncertainty as to lien rights if the validity of a CSP could be disputed.  However, in Vector Electric and Controls v Enviro-Abled Solutions Inc.  Master Smart declined to restrict a lien claimant to the minor lien fund, because of evidence that the CSP was incorrect regarding the value of work remaining to be completed.  Many standard form contracts avoid such potential disputes by requiring a project consultant to determine or certify when the work is substantially performed.

Contract Terms

It is worth noting that many contracts also require a certificate of substantial performance or “substantial completion” to be issued by a contractor or a consultant as a pre-condition to final payment or release of holdback.  Such a certificate will trigger the rights and obligations under the Act as described here, provided it also meets the statutory criteria (such as posting the certificate in a conspicuous place on the jobsite).  On the other hand, such a contractual certificate may serve a purely contractual function, and have no bearing on statutory lien rights, if it does not meet the statutory criteria.  The fact that there may sometimes be contractual documents called “certificates of substantial performance” that do not meet the statutory criteria – and therefore do not affect lien rights – is a potential source of risk and confusion.

Tuesday, 20 February 2018

Supreme Court of Canada Releases Decision on Labour and Material Bonds

Author: Will Johnston

The Supreme Court of Canada released a decision last Thursday (Valard Construction Ltd. v. Bird Construction Company) which imposes a new obligation on an owner or general contractor of a construction project who requires a Labour and Material Payment Bond (“L&M bond”) to take reasonable steps to proactively inform claimants of the existence of the L&M bond. Failure to take reasonable steps exposes the “trustee” of the L&M bond to claims of breach of fiduciary duty and damages if an unpaid subcontractor or material supplier loses their rights to advance a bond claim because they do not know of the L&M bond’s existence. Prior to this decision, the trustees named in an L&M bond would only be liable if they failed to disclose the existence of the bond when asked.
 
L&M bonds are typically used on large construction projects, especially for public infrastructure projects, but they are only mandatory if required by contract. The person who requires the contractor below them to obtain an L&M bond will be named in the L&M bond as the “trustee”. The trustee will almost invariably be either the project owner or the general contractor. A typical L&M bond provided by a subcontractor to a general contractor, includes language that creates a trust:
"The Principal (subcontractor) and the Surety (bonding company), hereby jointly and severally agree with the Obligee (general contractor) as Trustee, that every Claimant (sub-subcontractor or material supplier) who has not been paid … within 90 days … may sue on this Bond" 
 
Their purpose is to reduce the risk of disruptions from issues such as lien claims, procurement disruptions and work stoppages which can occur when lower level suppliers and subcontractors are not paid. The Supreme Court recognized that the security provided by an L&M bond is beneficial to an owner or general contractor even though they do not receive payment from the L&M bond themselves. This non-monetary benefit to the owner or general contractor was the underlying reason to justify imposing a duty on them as trustees to take “reasonable steps” to inform potential claimants of the L&M bond’s existence.  
 
The Supreme Court expressly states that not every failure to proactively inform potential claimants of the L&M bond will result in liability. The trustee only needs to take “reasonable steps” to inform potential claimants meaning that the underlying circumstances must be considered before a court can conclude whether a breach of the duty to inform has occurred. In this case,  Bird Construction Ltd. could have met their obligation by posting a copy of the L&M bond in its on-site trailer where they held daily toolbox meetings. “This would have provided a significant portion of potential beneficiaries with notice of the bond’s existence. The cost of doing so would have been negligible to Bird …” (at para 28). Another factor that motivated the Supreme Court to hold Bird Construction Ltd. liable was evidence that an L&M bond for this particular type of project was uncommon. Because of this, the trustee (Bird) should have anticipated that potential claimants would not be aware of the L&M bond’s existence and, in the Supreme Court’s view, the reasonable steps taken by a trustee under the circumstances would include proactively posting the L&M bond in the worksite trailer.  
 
This decision creates a great deal of uncertainty for owners and general contractors named as trustees in L&M bonds. The dissenting judgment expresses concern that trustees have little to no guidance as to how they can meet their duty to inform bond claimants given the wide range of factual circumstances. For example, how will the court determine which projects commonly have L&M bonds and which projects do not? What duties to inform should a trustee have to material suppliers who will not receive notice of the L&M bond if it is posted at the worksite?
 
Until future cases considering a broader range of factual circumstances are decided, the magnitude of risk now facing owners and general contractors cannot be predicted. At this time we can only describe the two extremes of a continuum. At one extreme we know that failing to take any steps whatsoever to inform potential claimants that an L&M bond exists on a project will not be acceptable. Conversely, we know that this new duty does not require absolutely every potential bond claimant to be sought out and informed of the L&M bond.  The extent of a trustees duty to inform will now fall somewhere between these two ends of the spectrum. The extent of the obligation will depend on the unique circumstances of each project such as the options available to give notice and the costs of doing so.  Future cases will likely consider whether a trustee must make additional efforts, beyond basic steps such as posting the L&M bond onsite, if the trustee is aware that their bonded subcontractor is facing financial difficulties and some bond claimants could lose their security.
 
This post is a follow-up to an earlier Blog Post, "Labour and Material Bond Claimants May Gain Further Rights".  

Thursday, 18 January 2018

Progressive Holdback Tricks and Traps


There are a few tricks and traps associated with the progressive release of builders’ lien holdbacks.  As mentioned in a prior article, the Alberta Builders’ Lien Act includes provisions for releasing the statutory holdback early, or in stages ("progressively"), which can be very important to promote cash flow on larger construction projects. In the simplest terms, a Certificate of Substantial Performance may be used to authorize the release of part of the holdback – that is, the holdback in relation to the value of work referenced in the Certificate – even though the overall project is not yet entirely complete.

Basic Principles

As a starting point, the Builders’ Lien Act requires the owner to retain a 10% lien holdback throughout construction.  On large projects, this can result in a significant drag on cash flow to the contractor and subcontractors.  In particular, subcontracts often provide that payment of the subcontractor’s holdback is not due until the general contractor receives corresponding payment from the owner.   This can result in a subcontractor waiting an extended time to receive its holdback.  The progressive release of holdback mechanism exists to remedy this problem.

Importantly, either the general contractor or a subcontractor can post a Certificate of Substantial Performance in respect of the work of the subcontractor.  This gives the subcontractor a measure of control over the timing of release of holdback by the project owner.  It also provides a means by which the overall holdback on the project can be reduced in several stages, as various subcontracts are completed.  If a Certificate is properly posted, and no liens are registered, the project owner may safely release the portion of the statutory holdback associated with the Certificate 46 days after the Certificate is posted. 

Basic Example

Consider for example a construction project that is expected to extend over two full years.  A subcontractor who does all his work in year one does not want to wait another year to receive his portion of the owner’s builders lien holdback.  So, the Act permits the general contractor or the subcontractor to post a Certificate when the subcontractor’s work is substantially performed.   Assuming no liens are registered, the owner can safely release the portion of the holdback attributable to that subcontractor 46 days after the Certificate was posted. 

On a $10M general contract, the holdback at the end of the project would be $1M if not for progressive release of holdback provisions.  But the progressive release of holdback by the owner in relation to the early completion of a $500k subcontract would reduce the statutory holdback by $50k (i.e. 10% of the subcontract value), such that the owner’s statutory holdback is reduced to $950k at the end of the project.  The owner retains the holdback to comply with the Builders’ Lien Act, but also to protect itself against insolvency or default by any contractor on the project.  In our example, assuming the owner has complied with the legislation in progressively releasing $50k upon completion of the subcontract, the owner’s liability for the holdback is reduced from $1M to $950k.

Permissive vs. Mandatory

One thing to keep in mind is that the Builders’ Lien Act permits the progressive release of holdback; it does not require it.  General contractors and subcontractors who want to be able to insist on progressive release of holdback by the owner must ensure there are contract provisions that require the owner to progressively release the holdback.  For example:

When 45 days have expired from the date of issue of the certificate of substantial performance in respect of that Subcontractor’s subcontract, as verified by the Consultant, and no builders’ liens have been registered for the Work, the Owner shall promptly release that Subcontractor’s portion of the major lien fund to the Contractor.  If no builders’ liens have been registered for the Work, the Contractor shall promptly release that portion of the major lien fund to that Subcontractor. (Canadian Construction Association, CCDC 2 (2008) Supplementary General Conditions for use only in the Province of Alberta)

Subcontractors might want to ensure that progressive release of holdback provisions are included in both their subcontract and the general contract; an omission of such provisions from either contract could prevent the subcontractor from insisting on the progressive release of holdback.  (Sub-subcontractors should ensure that such provisions are included in the general contract and every subcontract in the chain.)


Other Tricks and Traps

As always, owners must minimize their risk of liability under the Builders’ Lien Act by ensuring that the subcontractor or general contractor has complied with statutory requirements, before making a progressive release of holdback.  Many contracts are structured to include administrative requirements that mirror the statutory requirements, thereby protecting the owner who follows his contract.  Other contracts do not get into such detail regarding conditions for payment.  Above all, and in any event, the owner should check title to the project lands, to ensure no lien claims have been registered (for claims arising under the general contract in question) before making any payment on the contract, for progressive release of holdback or otherwise.

Finally, it is important to note that the legislation only contemplates the progressive release of holdback upon the substantial completion of an entire contract or subcontract.   It is not consistent with the legislation, and may expose the owner to financial risk, to progressively release holdback month-to-month, or in association with the completion of a phase of work that does not comprise an entire contract or subcontract.  I have seen a number of circumstances where the concept of progressive release of holdback is misunderstood, sometimes even set out by contract in a way that does not comply with the statute, resulting in significant financial risk to the owner (i.e. potential shortfall in the statutory holdback).

Properly accounting for multiple progressive releases of holdback can be challenging under any contract.  Experienced contract administrators and project managers are familiar with these challenges.  But we know from experience that administration of progressive releases is not straightforward, and errors can happen through inadvertence or inexperience.

Thursday, 2 November 2017

Statutory Remedies in Construction Disputes

Author: Graham Henderson
 
In the construction industry, insolvency is a regular occurrence that often leaves innocent companies unpaid for their goods and services. Insolvency also sometimes has a domino effect leading to the non-payment of multiple contractors and suppliers.
There are remedies available to companies to protect themselves from being affected by others’ insolvencies; however, those remedies typically have strict deadlines that cannot be missed. Companies often contact legal counsel after the deadlines have passed, missing opportunities to protect themselves.
The following chart provides a summary of the most prevalent statutory remedies available to companies involved in construction disputes:



 

Remedy

Companies Eligible for Remedy

Deadline

1.

Builders’ Lien

(Builders’ Lien Act, s. 6)

A company that provided materials or services for an improvement to land.

The company must register the lien within 45 days from the last day that materials or services were provided (90 days for improvements to oil or gas wells).

2.

Vendor’s Lien

(Builders’ Lien Act, s. 17)

A company that delivered materials for use in an improvement to  land, but whose materials have not yet been incorporated into the project.

The Vendor’s Lien expires as soon as the materials are incorporated into the improvement.

3.

Possessory Lien

(Possessory Liens Act, s. 2)

A company that expended money, labour or skill on a person’s movable property (e.g. objects and equipment, but not land), and in doing so enhanced the value of that property.

The Possessory Lien expires as soon as the property is no longer in the company’s possession.

4.

Unpaid Seller’s Lien

(Sale of Goods Act, s. 40)

A company that has sold goods but is still in possession of those goods.

The Unpaid Seller’s Lien expires as soon as the goods are no longer in the company’s possession.

5.

Public Works Claim

(Public Works Act, s. 14)

A company that provided materials or services for an Alberta government public works project.

For work on a roadway: The company must deliver a notice of claim between 30 to 90 days after the last day that materials or services were provided.

For any other work: The company must deliver a notice of claim within 45 days from the last day that materials or services were provided.

6.

Thirty Day Goods Claim

(Bankruptcy and Insolvency Act, s. 81.1)

A company that delivered goods to a purchaser that is now bankrupt. The goods must have been delivered within 30 days before the date of bankruptcy.

The company must deliver a written demand within 15 days from the date of the bankruptcy.

7.

Garage Keeper’s Lien

(Garage Keepers’ Lien Act, s. 2)

A company (known as the “Garage Keeper”) that stored or repaired a motor vehicle (including heavy-duty vehicles).

The Garage Keeper’s Lien expires as soon as the vehicle is returned to its owner, unless the Garage Keeper obtained a signed acknowledgment of indebtedness.

Further, in most cases, the Garage Keeper’s Lien must be registered within 21 days after the vehicle is returned to the owner (occasionally, earlier registration may be required).

There are many nuances to the statutory remedies and deadlines listed above. It is important for companies to be aware of the remedies and to contact legal counsel as soon as possible if they believe that one of the remedies may be applicable to their situation.
If you, or someone at your company, would like more information regarding your statutory remedies, feel free to contact any of the lawyers in our construction group.