Some of the most important provisions in Alberta’s Prompt Payment and Construction Lien Act (the “PPCLA”) relate to removing builders’ liens. The PPCLA allows a party to a construction project to offer security or payment into court to remove a lien. But what happens if the funds paid into court are subject to trust obligations? A recent decision of the Alberta Court of Appeal provides more clarity on this point.
Dispute between general contractor and sub-contractor on construction project
In Tempo Alberta Electrical Contractors v Man-Shield (Alta) Construction Inc, a dispute arose relating to the construction of a senior’s care facility in Edmonton between 2015 and 2017. The facility’s owner, Shepherd’s Care, hired the defendant, Man-Shield, as the general contractor for the project. Man-Shield hired Tempo, the plaintiff, to complete the electrical work.
Builders’ liens registered against project lands after construction delay
In December 2016, Tempo issued a certificate of substantial performance in relation to its work on the project. Subsequently, a 45-week delay on the project resulted in Tempo filing two builders’ liens, one in February 2017 and the other in June 2017. The first lien was removed when Man-Shield deposited a lien bond as replacement security for the land. The second lien was removed when the owner, Shepherd’s Care, paid cash into court as security.
Respondent applies to replace cash paid into court with lien bond
As part of a settlement between Shepherd’s Care and Man-Shield, Shepherd’s Care assigned its right to the money paid into court to remove the second lien to Man-Shield. Man-Shield then applied to replace the money with a lien bond in the same amount, saying it was experiencing cash flow issues as a result of the COVID-19 pandemic.
The applications judge granted the application, but Tempo appealed, arguing that Man-Shield shouldn’t have been allowed to access funds that were subject to a statutory trust under the PPCLA. The two issues raised on appeal were:
- Does the PPCLA permit the substitution of a lien bond for cash paid into court?
- If cash paid into court is held in trust under the PPCLA, can a party access those funds and replace them with a lien bond?
Can a lien bond be substituted for cash paid into court?
In addressing the first issue, the Court considered section 48 of the PPCLA. This section permits a lien registered on title to land to be discharged where security is given or payment is made into court. However, the law does not stipulate whether a party can substitute security for payment once the lien has been discharged.
The applications judge had concluded that Tempo suffered no prejudice by Man-Shield replacing the money paid into court with a lien bond. The lien bond was in the same amount as the monetary payment, and there was no indication that the insurer issuing the lien bond was not financially secure. The Court of Appeal also referred to the limited case law on the subject, which suggested security may be substituted provided there is no prejudice to the lien holder.
Unpaid parties protected by trust provisions in PPCLA
In addition to lien rights, the PPCLA also contains trust provisions to protect unpaid parties to a construction project. Section 22 of the PPCLA imposes a trust on funds paid out after the issuance of a certificate of substantial performance. The funds are held in trust for unpaid subcontractors and suppliers, and access to the funds is restricted.
Ability to substitute lien bond must be reconciled with trust obligations
The Court held that, although section 48 of the PPCLA allows a party to substitute a lien bond for money paid into court, this permission must be balanced against the trust provisions of section 22. Further, the PPCLA’s lien rights must be interpreted to avoid prejudice to the rights of owners and third parties.
As Tempo had issued a certificate of substantial performance and funds had been subsequently paid by Shepherd’s Care, the requirements for a statutory trust were satisfied. So, was the trust discharged by the lien bond?
Court holds that substitution of lien bond should not be permitted where trust exists
The Court cited the Supreme Court of Canada in Stuart Olson Dominion Construction Ltd v Structural Heavy Steel, concluding that while paying the full amount of the lien claim into court would discharge trust obligations, substituting the cash for a lien bond should not. Doing so would undermine the purpose of the section 22 trust provision, which is to ensure that construction project funds make their way from the owner to the contractor, and then to subcontractors and suppliers.
Since the money paid into court was trust funds, it could only be used for what section 22 of the PPCLA provides. Otherwise, a contractor would be able to access cash that it would typically have to hold as a trustee for unpaid subcontractors and suppliers. Accordingly, the Court held that the courts below had erred in their decisions to allow Man-Shield access to the cash paid into court by way of substituting a lien bond.
Takeaways for businesses operating in Alberta’s construction industry
The Court of Appeal’s decision has important implications for project owners and general contractors regarding cash flow planning. Once a certificate of substantial performance has been issued, a statutory trust exists and access to those funds will be restricted. Parties should take note of this before paying trust funds into court, as opposed to another form of security, if it is anticipated that access to those funds will be required down the line.
The decision reaffirms an interpretation of the PPCLA that protects the rights of lien holders and preserves the security they are entitled to.
Contact the insightful litigation lawyers at DBH Law in Calgary for advice on handling construction disputes
The knowledgeable construction lawyers at DBH Law understand the unique risks of construction projects and the expensive disputes that can arise when something goes wrong. We help clients with all aspects of construction projects and can proactively advise and help draft important documents like contractor and subcontractor agreements. Get in touch with our highly experienced team online or by phone at 403-252-9937 to arrange your consultation.