Written By Brian Reid, Geoff Stenger, Jason Roth, Peewara Sapsuwan and Rebecca Taylor
- Pursuant to the Prompt Payment and Construction Lien Act (the PPCLA), previously known as the Alberta Builders' Lien Act, funds paid following the issuance of a certificate of substantial performance are impressed with a statutory trust.
- If a party pays cash impressed with a trust into Court as security to discharge a builders' lien, they may not be able to access those funds down the road by replacing the cash with a lien bond.
- Therefore, it is important that parties consider the extent to which they may need access to cash before selecting the form of security they wish to use in order to discharge a builders' lien.
The PPCLA permits the removal of a lien where security is given or payment is made into court to stand in place of the project lands. The PPCLA also imposes a trust over funds paid out after the issuance of a certificate of substantial performance with the recipient holding such funds in trust for unpaid subcontractors and suppliers.
In Tempo Alberta Electrical Contractors Co Ltd v Man-Shield (Alta) Construction Inc, 2022 ABCA 409 [Tempo], the Alberta Court of Appeal considered the interplay between these provisions and held that where funds paid into court to discharge a lien are impressed with a statutory trust, the payor cannot replace the funds with a lien bond. However, if no such trust exists, then cash paid into court to discharge a lien can be replaced with a lien bond.
Trust Provisions of the PPCLA
At common law, subcontractors and suppliers generally do not have recourse against the owner due to the lack of privity of contract. To overcome this issue, the PPCLA allows a party to register a builders' lien to protect the unpaid party's interest in the subject lands, or mineral rights in the case of an oil and gas well site.
In addition to lien rights, section 22 of the PPCLA provides protection to unpaid parties by imposing a trust over funds paid out after the issuance of a certificate of substantial performance. The funds are then held in trust for unpaid subcontractors and suppliers.
In Tempo, Man-Shield, the general contractor for a seniors' care facility project in Edmonton, hired Tempo to perform electrical work on the project which suffered a lengthy delay. After issuing a certificate of substantial performance, Tempo filed two builders' liens, the first of which was removed when Man-Shield deposited a lien bond with the court. The second lien was removed when the owner paid cash as security into court.
As part of a settlement, the owner assigned the right to the money paid into court to remove the second lien to Man-Shield. Man-Shield subsequently applied to substitute the money paid as security to remove the second lien with a lien bond for the equivalent amount, citing cash flow issues due to the Covid-19 pandemic. Although the applications judge granted the application, Tempo appealed arguing that Man-Shield should not have been permitted to access the funds which were subject to a statutory trust under section 22 of the PPCLA.
The appeal raised two issues:
- Does section 48 of the PPCLA permit substitution of a lien bond for money paid into court?
- If money paid into court is held in trust under section 22 of the PPCLA, can a party access those funds and replace them with a lien bond?
The Alberta Court of Appeal held that although section 48 allows the substitution of cash paid into court with a lien bond, this must be reconciled with the trust obligations imposed by section 22 of the PPCLA. The Court of Appeal held that the PPCLA's lien rights must be interpreted to avoid undue prejudice to the rights of owners and third parties.
Since Tempo had issued a certificate of substantial completion and the owner paid the funds thereafter, the preconditions for imposing a statutory trust were satisfied. Referring to the Supreme Court of Canada's decision in Stuart Olson Dominion Construction Ltd v Structal Heavy Steel, 2015 SCC 43, the Court of Appeal held that although paying the entire amount of the lien claim into court would discharge the recipient's trust obligations, discharging the lien by way of a lien bond would not, as this would undermine the purpose of the trust provision. Therefore, substituting a lien bond for the funds did not discharge the trust obligations.
The Court of Appeal's decision in Tempo has important implications for owners' and general contractors' cash flow planning. While the form of security granted under the PPCLA may be substituted, once a certificate of substantial performance is issued and funds are paid into the court, a statutory trust exists, and such funds may not be readily accessible. Since builders' liens must typically be cleared for an owner to make payments or to receive progressive loans from a lender, a party should carefully consider whether to pay funds in trust to the court (in which case access to such funds may be limited) as opposed to another form of security including, for example, a lien bond or letter of credit.
For more information on the decision in Tempo or the PPCLA, please reach out to the Bennett Jones Construction group.