Lien Bonds Are as Good as Cash
Constructive Thoughts Newsletter
July 2023 - 6 min read
The Manitoba Court of Appeal reversed a chambers Justice's decision which held that a lien bond was not as good as cash for vacating liens on a Crown project. In doing so, the Court of Appeal noted that in situations where neither the creditworthiness of the surety nor the wording or conditions attached to the proposed lien bond are argued, lien bonds are as good as cash for vacating a builders' lien.
The Court noted that lien bonds are adequate substitute security and offer a practical solution to allow liens to be vacated in a manner that promotes business efficacy and accords with the aims and purposes of lien legislation.
Bird was the general contractor in the construction of a wastewater treatment plant being built on Crown lands for the City of Selkirk. Trotter & Morton was the major subcontractor on the project.
The parties were involved in a dispute, and Trotter & Morton notified the owner of two liens. In response to the lien claims, Bird filed an application under sections 55(2) and 55(3) of The Builders' Liens Act (the "Manitoba BLA") to discharge the liens upon posting lien bonds into court. Trotter & Morton opposed the application, arguing that a lien bond was an inappropriate form of security. It argued that Bird should be required to post cash.
Chambers Justice Decision
The chambers Justice found that in this scenario (for a lien on Crown lands that only represented a charge against the holdback but not the lands), a lien bond was not as good as cash. The chambers Justice reasoned that when cash is posted as security to vacate a lien, the lien claimant need only apply to the court to receive payment if it obtains a judgment. In the case of a lien bond, there is always a chance that the creditworthiness of the surety will have diminished by the time of judgment, and following a successful judgment, the lien claimant must then take steps to enforce the lien bond against the surety.
The chambers Justice also found that section 16 of the Manitoba BLA allows a lien claimant to assert a charge against the holdback (cash) retained by the owner since the project occurred on Crown lands. This results in a tighter relationship between the trust and lien remedies, as any funds paid by the owner to the general contractor constitute trust funds. By requiring the general contractor to pay cash into court to vacate the lien, there was no risk that the general contractor would improperly use the trust funds because the general contractor never received them.
Court of Appeal Decision
The Court of Appeal reversed the chambers Justice's decision.
With respect to the general adequacy of a lien bond, the Court noted that based on past court decisions from across Canada, lien bonds have generally been rejected only when there are concerns with the creditworthiness of the surety or the wording of or conditions attached to the bond. On the facts here, no such concerns were raised. The proposed surety – Travelers – is a large international company whose creditworthiness could not credibly be challenged. The proposed form of lien bond also was not objected to.
The Court of Appeal noted that the chambers Justice was mistaken that enforcing a claim against a lien bond requires more steps than enforcing against funds in Court. The proposed bond provided that Bird and Travelers would be "jointly and severally bound unto" the Court of King's Bench in the face amount of the lien. If Trotter & Morton obtained a judgment against Bird and Bird failed to satisfy that judgment, Travelers was required to pay the judgment amount into Court immediately up to the value of the lien bond.
The Court of Appeal also explained that the chambers Justice erred in his description of the nature of Trotter & Morton's claim. The chambers Justice noted that Trotter & Morton's lien claim represented a charge on cash in the form of a holdback account. This formed part of his reasoning that only cash could be used to vacate the lien.
However, the Court of Appeal clarified that Trotter & Morton's claim was, in effect, a charge over Bird's accounts receivable from the owner. Given that this was a Crown project, there was no segregated cash fund or "holdback account" representing this amount, as there would have been for a non-Crown project.
Further, the chambers Justice erred in his analysis of the relationship between trust and lien remedies under the Manitoba BLA. The Court of Appeal noted that funds retained by an owner do not become trust monies in the hands of the general contractor until the contractor actually receives the funds. Here, the owner retained the withheld funds and were not paid to Bird. Thus, they were not yet trust funds. Because lien and trust claims are separate, money paid into court to secure a lien claim is security only for the lien claim; it is not security for any trust claim.
Applicability in Alberta
The Court's comments on why lien bonds are an appropriate form of security mirror the general approach to vacating liens in Alberta. Like Manitoba, section 48 of the Alberta Prompt Payment and Construction Lien Act (the "PPCLA") allows security to be paid into court to vacate liens. In Alberta, the Courts contemplate lien bonds and cash as security interchangeably, with the template orders under section 48 of the PPCLA permitting either cash or a bond to be posted.
While the recent Alberta Court of Appeal decision in Tempo Alberta Electrical Contractors Co. Ltd. v Man-Shield (Alta) Construction Inc. appears at first glance to be at odds with the Manitoba Court of Appeal's conclusion, on closer inspection, the results are consistent. In the Tempo decision, the Alberta Court of Appeal held that cash previously paid into court by an owner after the posting of a certificate of substantial performance could not be substituted with a lien bond. As such, the Court did not permit substituting a lien bond for cash.
This decision was based on the funds in court already being trust funds. Under section 22 of the PPCLA, any funds paid by an owner after a certificate of substantial performance is posted are trust funds. The fact that the owner paid those funds into court made them trust funds.
In contrast, in the Manitoba case, Bird, as general contractor, was the party potentially required to pay funds into court. It had not received the funds from the owner. As the Manitoba Court of Appeal noted, no trust arose since the owner had not paid those funds to Bird or anyone else.
The Manitoba Court of Appeal's decision confirms that, absent concerns with a surety's creditworthiness or the terms of a lien bond, a lien bond is as good as cash. Practically, the odds of either criterion being met are extremely rare.
Canadian sureties who issue lien bonds are large, sophisticated entities, most of which also operate as insurers. Concerns with their creditworthiness would indicate much larger economic concerns generally. Also, the wording of lien bonds is fairly uniform regardless of the surety issuing the bond. As such, any concerns with bond wording are unlikely if the standard form wording is used.
This decision should provide added certainty for contracting parties that their existing bonding facilities can be used to obtain lien bonds to vacate liens rather than needing to pay cash into Court. As the Court of Appeal noted, this promotes business efficacy and accords with the aims and purposes of lien legislation: to allow funds to flow down the contract chain and for work to proceed while a lien claim is disputed later.
This is a nuanced area of law. Contact Anthony Burden in Calgary or Ryan Krushelnitzky in Edmonton with any questions related to this case, builders' liens, or lien bonds.
Link to decision: Bird Construction Group v Trotter and Morton Industrial Contracting Inc, 2023 MBCA 64