Legal Blog

Security

When it comes to vacating a lien and the posting of security is a lien bond equivalent to cash? The answer, like many in law, is that it all depends. On what, you say? Well, for starters, the province in which the project is situated and, of necessity, the statute governing construction and liens. Cases in one province may or may not apply in other provinces depending on the legislation involved. An example of the differences between Ontario and Manitoba construction lien legislation is set out in Bird Construction Group v. Trotter and Morton Industrial Contracting Inc., a 2021 decision of the Manitoba Court of Queen’s Bench.

Scene Set

Section 13 of The Builders’ Lien Act (Manitoba) (the “Act“) creates a lien against land for work and services supplied to that land. However, for Crown land, including municipal-owned land, the lien is not against the land, but against the holdbacks that the Crown must retain under the Act. Ontario has the same concepts.

After substantial performance of a wastewater municipal project, a sub registered two claims for lien, one for $2.3 million and one for $4.3 million. The general, who alleged deficiencies and delay, proposed to bond off the claims for lien. Even though the sureties were financially strong, the sub took the position that, although it would accept the general posting a lien bond for the $4.3 million lien, it wanted the general to pay cash into court to vacate the $2.3 million lien. We were not informed why it wanted cash security for one and not the other.

The general claimed that it wanted to use the remainder of the money due on the prime contract to pay other subcontractors. The sub countered that the general had already billed 99% of the prime contract price and that it was more important for the sub to receive its funds as soon as possible so that it could pay its subsubs. The judge repeated and then ignored both of these arguments.

Discretion

The general relied on s. 55(2) of the Act, which states:

Upon application, a judge may order security or payment into court in an amount equal to the holdback required under this Act as it applies to a particular contract and any additional money payable with respect to that contract but not yet paid but not exceeding the total amount of the claims for liens then registered against a parcel of land and may then order that the registration of those liens be vacated.

The judge noted that the section is designed to provide flexibility. It seeks “to balance the need to protect a sub-contractor’s legislated right to some security in the event of non-payment, especially in the case of insolvencies, against the need for a general contractor to access agreed-upon funding from the owner in order to ensure it can make its payments.”

The motion judge interpreted this section, particularly the words “a judge may order,” to give him the discretion to determine whether to allow cash or a lien bond in order to vacate the claims for lien. He then concluded that a lien claimant had the right to insist on the best method to be used from its point of view and stated, “any security that is ordered under section 55(2) of the Act should be at least as good as, if not better than, the security provided to the lien claimant under section 13 (the lien creation section for non-Crown land)”. In that regard, he compared the various forms of security and the effect of each on a lien claimant.

Cash or Bond

In the normal situation, in which the lien is registered against land, a lien bond from a reputable surety is, in the judge’s opinion, often better security than the land itself. The value of the land may decrease (unlike a bond or cash) and a lien bond is much easier to enforce than the cumbersome process of a court-ordered sale of land.

However, the lien in this case was not against the land; it was against the holdbacks to be retained under the Act. The judge was therefore not comparing a lien bond to land; he was comparing it to cash. He concluded that a lien bond, in this situation, was not as solid as cash. He gave two reasons:

• After judgment, it is very easy to get paid from cash; it is sitting in court. It is not necessarily as easy to get paid from a surety; the surety’s credit worthiness may have diminished by the time of judgment.
• If holdback monies are retained or paid into court, there is no risk that a contractor could improperly use the trust funds – because the contractor never receives them. Conversely, if a lien bond is used, then the contractor could requisition all funds from the owner and, possibly, breach its trust obligations (i.e. the contractor has use of the money, not the lien claimant).

The judge recognized that this analysis resulted in lien claimants on a Crown project being in a stronger position than they would have been on an ordinary project with the regular lien registration process. He stated that, if that difference was unfair, it was up to the legislature to correct it.

Result

The judge noted that the municipal owner owed no more than $4.9 million to the general for the project. Accordingly, because the lien was against the holdbacks, the sub was limited to that amount for its security. The judge ordered the general to post cash of $2.3 million for the first lien and a lien bond of $1.6 million for the second (and, no, we do not understand how he arrived at the lien bond amount). We understand that this decision is under appeal.

Comparison

Could the reasoning in this decision have been used for an Ontario project? We suggest that it could not have.

Section 44(1) of the Construction Act (Ontario) states that upon motion of any person, without notice, the court shall make an order vacating the registration of a claim for lien or, if a lien only attaches to the holdbacks, to the claim for lien itself. The court shall do so if the person bringing the motion pays into court or posts as security the full amount of the claim for lien plus an amount towards costs.

We do not read this section as granting any discretion to the court to determine whether to demand cash rather than a lien bond. We have not seen any Ontario jurisprudence claiming that discretion and are quite certain that lien bonds have been accepted many thousands of times. The only real issue for the court is whether the lien bond itself is acceptable (i.e., is the lien bond amount correct; does the surety fall within a list of acceptable sureties; and is the lien bond on a form that is acceptable to the court?)

Moral

The moral has nothing to do with construction practice and everything to do with the review of construction cases. Although the various provinces have similar lien legislation, the concepts contained in that legislation are not always identical. Accordingly, for example in Ontario, we have to view cases arising out of, for example Manitoba, with a grain of salt. The Manitoba cases may make sense in Manitoba, given its legislation, and be inapplicable in Ontario, given its legislation.

 

Image courtesy of Munir777.

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