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
