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

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