Legal Blog

Vacate Lien

A general knows that it cannot pay its sub in the face of a notice of lien by a subsub. The general, therefore, posts security for the amount of the lien claimed plus 25% for costs and obtains an order vacating the lien from title to the owner’s lands. The money can then flow down the chain and the subsub’s construction lien on the lands has been transferred to the security paid into court by the general.

Now assume that other subsubs register liens that are removed from title in the same manner. The sub is either kicked off the job or abandons it. The general hires another sub or uses its own forces to complete the work. Almost inevitably, the monies paid to the sub prior to abandonment, plus the costs to complete the work, exceed the monies that the general was supposed to pay the sub under its contract had the sub completed all of the work.

Assume that the claims of the subsubs are valid and the cost to complete of the general is also accurate. Do the subsubs get the amount of their claims plus 25% in costs or are the subsubs limited in aggregate to 10% of the value of the work performed by the sub, an amount that was either held back by the general or ought to have been held back?

No Brainer 

We would have thought that the answer to this question is obvious.

The Construction Lien Act stipulates that a payer under a contract (the general in our example) must hold for the benefit of the lien claimants two rungs down the ladder (the subsubs in our example) the greater of two amounts (the “Liability Amount”). The first is the amount actually owed to the person with whom the payer contracted (the sub in our example). The second is the usual holdback, 10% of the value of the work done under that contract. The amount thus owed by a general could be substantially less than the aggregate of the amount owed by the sub to each of its subsubs.

The Act recognises that in order to keep money flowing on a construction project, there must be some mechanism to substitute other security for the lands against which liens are registered. Consequently, security may be posted for the amount of the lien claim, plus 25% for costs, and the lien is vacated from title. By taking advantage of this mechanism, does the person posting security give up its right to be liable only for the Liability Amount once the issues are settled at trial?

The answer to this question must be a resounding no. Anyone who has even a modicum of knowledge of the construction industry knows that, otherwise, a project would grind to a halt the moment the first lien was registered. No payer in its right mind would vacate the lien if it knew that, by doing this, it could become liable for an amount far greater than the Liability Amount.

The Cases  

In 1988, one judge, who obviously did not have that modicum of knowledge, actually held that the general had to pay the full amount of the security even though this was far in excess of the Liability Amount. We considered this decision to be an aberration.

One year later, another judge looked at the first decision and declined to follow it. That judge obviously had some understanding of the Act and the construction industry. The score is now 1 for and 1 against.

Nine years later, some enterprising lawyer decided to tackle the subject again. Fortunately, the judge in James Dick Construction Ltd. v. Durham Board of Education, a 1998 decision of the Ontario Court (General Division), broke the tie in favour of sanity. He supported judge no. 2 and held that the payer was liable only for the Liability Amount, not the aggregate value of the secured amounts to vacate the liens from title.

Moral

Individual judges do not always make the right decision. That is why litigation is a crapshoot. Fortunately, in the long run, a bad decision is usually rectified. This is good for the law but is no solace for the litigant saddled with a bad decision.