In a recent British Columbia decision on the release of holdback funds, the court had to rule on whether a construction project had been completed after a contractor was terminated and replaced with another.
School Board Hires and Fires Contractor for Construction Project
A school board in British Columbia and a general contractor signed a contract (the “head contract”) for construction of a replacement secondary school. An insurance company issued a performance bond for the project.
However, following defaults under the head contract, the school board terminated the general contractor’s right to continue with the work. The school board alleged that the general contractor had repeatedly failed to complete the work in a timely manner and failed to pay subcontractors and material suppliers.
New Contractor Hired to Complete Project
Following the general contractor’s termination, the school board asked the insurance company to“take steps to complete the Construction Contract in accordance with its terms and conditions.” The insurance company decided to arrange for a replacement contractor and entered into a completion contract with a new contractor and the school board.
The school board retained a holdback of $4,270,564, or 10% of the certified value of work completed, pursuant to the British Columbia Builders Lien Act (the “Act”).
Multiple Parties File Court Claims Over Holdback Funds
Following the termination of the general contractor, it filed a lien claim in the amount of $6.3 million and commenced action to enforce it. In response, the school board counterclaimed for damages. Additionally, a number of the general contractor’s subcontractors filed lien claims and commenced actions to enforce their claims. Those claims were released on payment or posting of security by the insurance.
Meanwhile, the school board and the insurance company also went to court. The insurance company argued that the school board had to use the holdback funds for the purposes of completing the project. In turn, the School Board claimed that s. 8 of the Act required it to continue holding the funds until after work was completed, which had not yet occurred.
Holdback Rules Under the Act
Section 8 of the Act states:
8 (1) If a certificate of completion is issued with respect to a contract or subcontract, the holdback period in relation to
(a) the contract or subcontract, and
(b) any subcontract under the contract or subcontract
expires at the end of 55 days after the certificate of completion is issued.
(2) The holdback period for a contract or subcontract that is not governed by subsection (1) expires at the end of 55 days after
(a) the head contract is completed, abandoned or terminated, if the owner engaged a head contractor, or
(b) the improvement is completed or abandoned, if paragraph (a) does not apply.
(3) [Not in force.]
(4) Payment of a holdback required to be retained under section 4 may be made after expiry of the holdback period, and all liens of the person to whom the holdback is paid, and of any person engaged by or under the person to whom the holdback is paid, are then discharged unless in the meantime a claim of lien is filed by one of those persons or proceedings are commenced to enforce a lien against the holdback.
At issue was whether the head contract had been “completed, abandoned or terminated” pursuant to s. 8(2)(a). The insurance company claimed that it had, which meant that the school board was free to release the holdback funds and use them toward the cost of completing the project. However, the school board submitted that the head contract was still in effect and not yet completed, with the new contractor having simply stepped into the general contractor’s shoes for the purpose of completing it. Thus, it argued that it could not release the funds until the project was completed by the new contractor.
Court Rules That Project Not Complete
Citing previous case law, the court stated that the intention of the parties is determinative on the factual question of whether a contract has been abandoned, completed or terminated. The court noted that while there was no evidence relating to the general contractor’s intention, the school board’s intentions were evidenced in the completion contract with the new contractor and the insurance company.
The court then cited relevant portions of the completion contract, which stated that the new contractor was assuming full responsibility for “each and every obligation and duty originally undertaken and as yet unperformed by [the general contractor] with respect to the Construction Contract”. It further stated that the new contractor agreed to perform those obligations in the same manner as if it “had been the original contractor under the Construction Contract.”
As such, the court ruled that the clear intention of the completion contract was that the head contract remained in force and was to be completed, with the new contractor assuming the general contractor’s rights and obligations.
Court Rules That Holdback Funds Cannot be Released
The court further discussed the purpose of s. 8 of the Act, stating:
“[Section 8] gives claimants three ways to make that determination, depending on the nature of the project. Two of them—the certificate of completion under s. 8(1) and completion or abandonment of the project under s. 8(2)(b)—are based on objective evidence available to or observable by potential lien claimants. In each of those cases, the question is whether significant work on the project is continuing.
I find that s. 8(2)(a) must be interpreted according to the same criteria. Potential claimants, such as subcontractors, do not necessarily know the state of the contractual or legal relationship between the owner and the head contractor. They may only be able to observe whether work is still being done.”
In the result, the court therefore concluded that the head contract had not been “completed, abandoned or terminated” within the meaning of s. 8 (2)(a) of the Act and the school board was required to retain the holdback until the expiry of 55 days following substantial completion of the work under the completion contract.
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