Trust the process

(PHOTO: © ANDREY POPOV / ADOBE STOCK)

A recent Alberta Court of Appeal decision, Tempo Alberta Electrical Contractors Co. Ltd. v. Man-Shield (Alta) Construction Inc., continues the debate started by the Supreme Court of Canada in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel regarding posting security to vacate liens and discharging trust obligations under builders’ lien legislation.

In the Tempo case, the Alberta Court of Appeal decided that security paid into court to discharge a lien, pursuant to section 48 of Alberta’s lien legislation — now Alberta’s Prompt Payment and Construction Lien Act (PPCLA) — may be substituted for a different form of security, provided there is no resulting prejudice to the lien holder. However, the court also determined that cash paid into court as security may not be substituted with other security, such as a lien bond, where those funds are impressed with a statutory trust.

Posting security into court to discharge builders’ liens is a key function of lien legislation across the country. The registration of a lien on title to a project stays the hand of the paymaster, which can bring a project to a halt, expose those continuing to work to increased risk of non-payment, and create cash flow challenges. To mitigate these consequences, lien legislation creates a process by which the lien may be discharged, contract funds continue to flow, and the lien claim be resolved without compromising the protections afforded to the lien claimant.

Where security is posted for the amount the lien claim, plus costs, the security will stand in place of the land and the registered lien will be discharged from title. It is typical to post a lien bond, rather than cash, as security to discharge a lien to maximize operational cash flows. Once the lien has been discharged, the owner can resume making payment.

The PPCLA is, however, silent on the ability to substitute cash for security (or vice-versa). On that point, the Alberta Court of Appeal concluded that the PPCLA permits substitution of the form of security, absent demonstrable prejudice to the lienholder.

However, the nature of a lien bond is such that if the lien is ultimately determined to be invalid, the claim against the lien bond is extinguished. Unlike a lien bond, where cash has been paid into court, the funds paid into court may also be impressed with a trust and a trust claim could still be made against the funds even if the lien claim is found to be invalid.

Whether a trust actually exists may vary by province, as the statutory trust provisions differ. For example, in Alberta, the trust provisions are only engaged when the owner makes a payment after a certificate of substantial performance is issued. Regardless, because a lien bond would not respond to a breach of trust claim, replacing funds that are impressed with a statutory trust with a lien bond could arguably put the trust funds at risk.

In Tempo, the Alberta Court of Appeal focused on this issue when deciding the lower courts erred and that the application for the substitution of the security ought to have been dismissed.

Though each case must be considered on its facts and the specific wording of the applicable lien legislation, similar judicial activism has appeared in similar Manitoba cases and is present in the Supreme Court of Canada’s reasoning in the Structal case.

Notably, lien statutes across the country have mechanisms to post security for lien claims and not trust claims. In Tempo, the cash paid into court by the owner was to stand in place of the lands to discharge a builder’s lien, not as security for the subcontractor’s trust claim (which had not even been advanced). Nonetheless, the Alberta Court of Appeal determined that the cash paid into court had been impressed with a statutory trust and therefore should not have been substituted with a lien bond. This was despite the fact that the lien claimant would suffer no prejudice to its lien claim, which suggests that the court came to this conclusion based on prejudice that the substitution of security would have on a statutory breach of trust claim.

The Tempo decision provides clarity with respect to a party’s ability to substitute security under the PPCLA and may provide guidance to other jurisdictions. However, the decision is also another example of an emerging trend in Canada where courts demonstrate a willingness to protect the rights of trust claimants under lien legislation and may arguably be creating a security for trust claims where none expressly exists.

Trish Morrison (Photo courtesy of Borden Ladner Gervais LLP)

Theron Davis (Photo courtesy of Borden Ladner Gervais LLP)

Trish Morrison, partner and national business leader, and Theron Davis, senior associate, are construction lawyers at Borden Ladner Gervais LLP. This article provides an overview and is not intended to be exhaustive of the subject matter contained therein. Although care has been taken to ensure accuracy, this article should not be relied upon as legal advice.