Court Provides Clarity on Substituting Lien Bonds for Cash in Court
January 2023 - 4 min read
The Court stated that while posting a lien bond as a replacement for cash paid into court can free up funds that help lead to the completion of the project, doing so cannot be done if it undermines the trust provisions of lien legislation. Substituting a lien bond for cash in court after a certificate of substantial performance has been posted would disrupt the flow of funds within the construction pyramid.
Parties to construction projects should be aware of requests to substitute lien bonds for cash in court, particularly where prejudice may result.
It's standard practice in Alberta to post either a lien bond or cash as security to discharge a builder's lien, but can a lien bond be a valid substitute for cash paid into court? Are funds paid into court subject to trust obligations? The Alberta Court of Appeal faced this scenario in Tempo Alberta Electrical Contractors Co. Ltd. v Man-Shield (Alta) Construction Inc.
The owner hired Man-Shield as the general contractor for the construction of a seniors' care facility in Edmonton. Man-Shield hired Tempo as its electrical subcontractor.
Tempo issued a certificate of substantial performance ("CSP") for its work in December 2016. A 45-week delay in construction on the project resulted in both Man-Shield and Tempo registering builders' liens against the project. Tempo registered its liens in February and June 2017.
Tempo's first lien was removed from title in February 2017, when Man-Shield deposited a lien bond into court as security for the land. Tempo's second lien, the subject of the appeal, was removed from title in June 2017, when the owner paid cash into court as security.
In February 2018, Man-Shield and the owner settled their litigation. Part of this settlement involved the owner assigning Man-Shield its right to the money it had paid into court as a partial payment of the amounts Man-Shield was owed. In May 2020, Man-Shield brought an emergency application to replace the cash paid into court with a lien bond in the same amount. Man-Shield cited cash flow issues related to the COVID-19 pandemic as reasoning for this substitute.
The applications judge and chambers judge determined that the lien bond was a valid substitute for the cash paid into court. Tempo appealed the chambers judge's decision, arguing that the orders of the lower court effectively permitted Man-Shield to access and utilize funds impressed with a statutory trust for its own purposes, wholly unrelated to the completion of the project, contrary to the intent of the Builders' Lien Act ("BLA").
The Court of Appeal was tasked with determining whether section 48 of the BLA permits the substitution of a lien bond for money paid into court and if the money paid into court was impressed with a trust by virtue of section 22.
Can a party substitute a lien bond for cash paid into court?
Section 48 of the BLA (carried forward without change into the Prompt Payment and Construction Lien Act) permits a party to give security or make payment into court to stand in place of the lands as security for a lien. The lienholder's lien rights are transferred to the security posted or the funds paid into court.
While section 48 contemplates the discharge of a lien through a cash deposit, it is silent on whether a party can substitute a lien bond or other form of security for cash once the lien has been discharged.
The Court of Appeal stated that, from a practical standpoint, posting a lien bond as a replacement for money paid into court enables mortgage advances and frees up working capital that assists in the completion of the project. Further, the type of security may be substituted, provided there is no prejudice to the lienholder. As such, a lien bond may be substituted for cash in court as long as there is no prejudice to the lienholder.
This conclusion is consistent with other jurisdictions in Canada regarding construction occurring on private lands. However, the Manitoba Court of King's Bench in Bird Construction Group v. Trotter and Morton held that cash paid into court was superior to a lien bond for work on Crown lands. That decision is under appeal and likely inapplicable to Alberta, where Crown lands are exempt from liens.
Does the s. 22 trust provision of the Builders' Lien Act apply to funds paid into court?
While the Court noted that a lien bond generally can be substituted for cash, consideration must be given to whether the trust provision of section 22 of the BLA arises. Section 22 provides that when a CSP is issued, and the owner makes a payment after that time, those funds are trust funds for the benefit of any parties owed funds by the general contractor. In this case, the owner paid the funds into court rather than directly to Man-Shield as the general contractor.
The Court held that notwithstanding that the owner paid the funds into court, the funds were still impressed with a trust. Tempo issued a CSP, and the owner made a payment after that date.
The Court concluded that, upon the triggering of a section 22 trust, a Court should not allow a lien bond to be substituted for cash. Doing so undermines the purpose of the trust provisions in section 22, which is to provide for the flow of funds within the construction pyramid - owner to the contractor, contractor to each subcontractor and supplier. As the monies paid into court were trust funds, they cannot be used for any other purpose other than what section 22 of the BLA provides. Otherwise, a contractor would have access to cash that it otherwise would have to hold as trustee for its unpaid subcontractors and suppliers.
In Alberta, section 48 of the BLA permits the substitution of the form of security where there is no demonstrable prejudice to the lienholder. While funds in court being impressed with a trust is one example of potential prejudice to a lienholder, there may be other scenarios where a lienholder could argue that a lien bond should not be substituted for cash.
If you would like advice on the form of security proposed to discharge a lien, or whether an attempt to substitute one form of security for another is appropriate, please contact Anthony Burden or Logan Maddin in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law's Construction Group for guidance and assistance in this area.
Link to decision: Tempo Alberta Electrical Contractors Co. Ltd. v Man-Shield (Alta) Construction Inc., 2022 ABCA 409.