October 14, 2015

Two Remedies for Unpaid Subcontractors: Trusts and Liens

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The Supreme Court of Canada released its decision in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, 2015 SCC 43, on September 18, 2015 and clarified the interaction between lien claims and statutory trusts upon the filing of a lien bond. The Court found that filing a lien bond to remove a lien from property does not satisfy a contractor’s trust obligations. Although double recovery is not permitted, a subcontractor has two separate remedies that can be pursued contemporaneously: (1) lien claims; and (2) claims against statutory trust funds.

Facts

Structal was the subcontractor for Dominion, the general contractor.  Dominion withheld payment from Structal, and Structal registered a builder’s lien. Dominion filed a lien bond in the full amount of the lien in order to vacate the lien against the property and allow funds to flow on the project.  Dominion continued to receive progress payments from the owner, and Structal argued that notwithstanding the lien bond in place, Dominion was still required to comply with the trust provisions of the Manitoba Builder’s Lien Act.  Dominion disagreed arguing that it had set-off against monies claimed by Structal, there was no breach of trust, and Structal was fully secured by the lien bond.  The owner withheld funds from Dominion at Structal’s request, at which point Dominion applied to the Court for a declaration that the lien bond satisfied its trust obligations to Structal.

The Decision

The Supreme Court of Canada held that there are two independent remedies available to subcontractors that can be pursued at the same time: liens and trusts.  Filing a lien bond with the court does not extinguish statutory trust obligations.  A lien bond only takes the place of the property that was encumbered by the lien so funds are able to flow on the project.  However, the lien bond is only available in the event of a lien judgment.

The purpose of the statutory trust, as previously articulated by the Manitoba Court of Appeal, is to help ensure that money payable by owners, contractors and subcontractors flows in a manner which is in accord with the contracted rights of those engaged in a building project and not diverted out of the proper pipeline.  A finding that a trust claim is extinguished by filing a lien bond would undermine this purpose. 

As a result, even where a lien bond is filed, the contractor or trustee must also maintain amounts received as trust funds thereby resulting in double security for a subcontractor.  However, any payment under the trust does serve to reduce the amount of the lien claim to the extent it is for the same obligation.  In other words, double recovery is prohibited.

The Court did offer a solution – a contractor is able to pay trust funds into court rather than depositing a lien bond to vacate the lien, which would not breach trust obligations.

Lessons for the Atlantic Canadian Construction Industry

The impact of Stuart Olsen varies depending on the legislation in each province.  In Atlantic Canada, currently neither Prince Edward Island nor Newfoundland and Labrador have trust provisions, so there is no impact on current practice.  In New Brunswick and Nova Scotia the legislation does contain trust provisions and the wording of the legislation in each Province makes it likely that a Court would reach the same conclusion as in Stuart Olsen.  As a result, contractors need to be aware of their continuing trust obligations, which are not extinguished by filing a lien bond.  Subcontractors and suppliers should also recognize that there are two distinct remedies available to them to ensure payment. 

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Two Remedies for Unpaid Subcontractors: Trusts and Liens

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