Legal Blog

Construction Act – Part 3 – Holdbacks, Lien Expiry, Lien Perfection, and Exaggerated Liens

This is our 3^rd instalment on the changes to the Construction Lien Act (“CLA“), which, on July 1, 2018, became the Construction Act (the “Act“).

Holdbacks

There are three types of holdbacks (and these holdbacks have not changed):

1. Basic holdback – 10% of the price of services and materials actually supplied.

2. Finishing holdback – 10% of the price of services or materials supplied after substantial performance of the prime contract.

3. Notice holdback – basic holdback plus any amount, up to the amount of the lien, that the recipient payer owes to its payee – after a lien claimant delivers a written notice of lien.

Under the CLA, a payer had to retain a holdback in cash. Under the Act, a payer may retain some or all of the holdback in other forms (e.g. letter of credit or bond that a payee would post). However, owners have an incentive to retain the holdback in cash. If they pay the full holdback, then they have financing charges that would not have been incurred had they simply kept the money. Of course, if an owner continues to retain a cash holdback, a general will certainly not accept holdback security from a sub because the general would be paying money that it has not received from the owner. Accordingly, what happens with holdback on any given project will depend significantly on the terms of the prime contract.

Holdback Payment

The CLA stated that a payer “may, without jeopardy” pay the holdback. Although there is no real difference in result, the Act stipulates that a payer “shall” pay the holdback. It accentuates the philosophy of the Act to get the money moving down the chain as soon as possible.

Under the CLA, a payer could release the holdback 45 (60 under the Act) days after publication of substantial performance. Accordingly, an excavation subcontractor on a large project might have to wait years to receive its holdback. Partial release of holdback never occurred.

The Act, however, allows a payer to pay accrued holdback on an annual basis if the following conditions are met: (i) the project schedule is longer than one year; (ii) the contract provides for it; (iii) the contract price exceeds $20 million (per draft regulations); and (iv) any liens against the project have been discharged or vacated.

Similarly, the Act allows the payment of accrued holdback as phases of a project are completed. Under the CLA, a payer had no means by which it could safely pay holdback on a phase by phase basis.

Again, an owner has an incentive not to allow an early release of holdback. Financially, it is far better for the owner not to have to pay the money until it absolutely has to. A general has an incentive not to allow an early release of holdback because the holdback retention gives the sub a financial incentive to completely finish its contract. Accordingly, if an owner pays holdback to a general, the general will be content to pay holdback annually to, say, its excavation sub (because the work is obviously finished), but might not be content to pay holdback annually to, say, its electrical sub (because the electrical work continues throughout the entire project).

Non-Payment H/B

The Act allows an owner initially to refuse to pay holdback if, within 40 days of the publication of substantial performance, the owner publishes a notice specifying the amount it refuses to pay and notifies the general that it has done so. In effect, this keeps the status quo – except that at least everybody working on the project knows what the owner has done. Previously, the owner, often at its whim and whether correct or incorrect, would retain whatever holdback it wanted.

The rules change on October 1, 2019. They allow the general to refuse to pay holdback to subs, but only if (i) the owner has refused to pay the holdback, (ii) the general refers the holdback dispute with the owner to adjudication, and (iii) the general notifies every sub of the amount that is not going to be paid and that the dispute will be referred to adjudication. The rules apply similarly to subs.

Lien Expiry

The start date by which a lien must be registered has not substantially changed. For the general, it is the earlier of the date of publication of substantial performance and the date the prime contract is completed, abandoned, or terminated. If there is no substantial performance publication or the lien relates to services or materials supplied after substantial performance, it is the earlier of the date the contract is completed, abandoned, or terminated. For a sub, it is the earlier of (i) the date of publication of substantial performance of the prime contract, (ii) the date on which the sub last supplies services or materials, (iii) the date the prime contract is completed, abandoned, or terminated (new in legislation, but not in jurisprudence); and (iv) the date on which a subcontract is certified to be complete (new, but depends upon whether the prime contract will allow for subcontract certification).

The Act introduces the concept of the termination of the prime contract. It specifies that when the prime contract is terminated, either the owner or the general must publish notice of that termination. Presumably, it would be unfair for the sub to lose its lien rights because it did not know of the termination of the prime contract. We see a problem with the legislation because the start date references the date that the prime contract is terminated, not the date on which notice of that termination is published.

Lien Preservation

Under the CLA, unless preserved, a lien expired 45 days after the lien preservation start date. Under the Act, that period has been extended to 60 days. Similarly, holdback retention extends to 60 days.

The lien is to be preserved by registering it against title to the project or, in the case of the Crown or municipality, by giving appropriate notice. Once the adjudication provisions become effective, the Act provides that, if the lien relates to an issue under adjudication, the lien expires on the later of the normal expiry and 45 days after the start of the adjudication process.

Lien Perfection

Under the CLA, a validly preserved lien had to be perfected within 45 days of the date on which the lien could have been preserved. The Act extends that time from 45 days to 90 days. A lien that attaches to land is perfected by commencing an action and registering a certificate of that action against the land. A lien that does not attach to land, in the case of the Crown or municipality, is perfected merely by commencing an action.

Exaggerated Liens

Under the CLA (sections 35 and 86), a person affected by an improper lien had two remedies: one in liability and the other in costs.

Under section 35, a person who claimed a grossly excessive lien or knew or ought to have known that there was no lien at all, was liable for damages suffered. Under the Act, it is not a question of a grossly excessive lien; rather the claimant must know or ought to have known that the lien has been wilfully exaggerated or that there is no lien at all. Further, under the Act, even if the claimant acted in good faith, the court may still reduce a lien by the amount that has been exaggerated.

Under section 86, a lien claimant, or person who knowingly represented the claimant or participated in the preservation or perfection of a lien, was liable for costs if the claim for lien had expired or was without foundation or claimed a grossly excessive amount. The Act provides the same remedy if, clearly, that the claim for lien had expired, was without foundation, was frivolous, or was for a wilfully exaggerated amount. Further, a person can also be liable for costs if the person prejudices or delays the conduct of a lien action.

 

Image courtesy of DodgertonSkillhause.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.