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.