Legal Blog

Substitute and Reduce

After a lien is registered, it is not unusual for the lien to be quickly vacated by way of a payment into court. Sometimes, it simply takes too long to obtain a lien bond. Further, if a contractor needs to vacate the lien quickly to release monies otherwise payable, the contractor is not going to quibble over the amount of the lien – even if it is inflated. The contractor will simply pay the amount claimed, plus 25% for costs, into court.

Later, when all monies owed to the contractor have been paid, can the contractor do anything to substitute a lien bond for the cash and reduce the amount being secured? Although the answer to this question was apparent in practice, a lien claimant took another run at it in Tom Jones Corp v. OSBBC Ltd., a 1997 decision of the Ontario Court (General Division).

Facts 

There was a construction pyramid stretching from the owner, through a general, a sub, and a subsub, to 3 equipment suppliers. The subsub abandoned the contract and the suppliers liened the project. The liens were in the aggregate amount of $180,000. The sub had paid the subsub all but $70,000 of a $500,000 contract. The general paid $225,000 ($180,000 plus $45,000 for costs) to vacate the liens and, no doubt, held back those monies from the monies otherwise due to the sub. The sub brought a motion to substitute a lien bond, which it had obtained, for the monies paid into court by the general and to reduce the amount of the security from $225,000 to $87,500 ($70,000 plus $17,500 for costs).

Substitute

The judge first dealt with the question of whether a different form of security could be substituted for cash. He noted that the Construction Lien Act did not make express provision for this. However, he concluded that an interpretation that would disallow such a substitution “would be unduly restrictive and perhaps absurd“. He noted that a substitution would make no difference to a lien claimant but would allow the contractor posting a lien bond to free up working capital that could be put to better use in completing the project. Accordingly, he allowed the substitution of a lien bond for the cash paid into court. The next question was how much of a bond?

Reduction 

If the amount of money owed by the sub to the subsub was in dispute, the court would not, at the motions court stage, determine this question. However, there was no dispute in this case. The only money owed by the sub to the subsub was $70,000. The suppliers took the position that once money was paid into court to vacate a lien, it would remain as security for all liens, regardless of the monies owed by the payer (i.e. the sub) two rungs above the lien claimants (i.e. the suppliers). This position was supported in one case and not supported in another.

As far as we are concerned, the position of the suppliers, and the case that supported it, was misguided, contrary to economic reality and wrong.

Fortunately, the decision in this case supports our criticism. The judge noted that the purpose of payment into court is simply to substitute other security for the lien on the land; “it is done without any admission of liability and without any admission as to the validity of the claims for lien”.

As a result, the judge allowed the security to be reduced to the total amount owing by the sub to the subsub, an amount which was in excess of the statutory holdback, of $70,000 plus 25% for costs.

If the sub did not claim that there were only valid liens for an amount less than $70,000, we can see no reason for the additional 25% for costs. If the sub is not disputing the fact that the $70,000 should be paid to the suppliers, there should be no provision for costs because the sub is simply not part of the dispute.