Law Times

Law Times • sepTember 21, 2015 Page 13 www.lawtimesnews.com Release of holdback funds a key issue in lien act review BY MICHAEL McKIERNAN For Law Times O ntario construction lawyers are hoping a review of the province's Construction Lien Act will provide players in the industry with a more effective early-release mechanism for holdback funds. Under the act, owners and contractors must hold back 10 per cent of the price of their contracts with contractors and subcontractors as a form of security for payment. However, owners' holdback obligations to their contractor only typically expire once the lien deadline has passed. With the deadline coming 45 days after the issuance of a certificate of substantial performance, that means most subcontractors end up waiting until the end of a project to see the final 10 per cent of their money regardless of when they completed their own portion of the work. Lianne Armstrong, a partner at Lern- ers LLP in London, Ont., says the increas- ing number of complex or phased infra- structure projects means subcontractors can sometimes wait years before they re- ceive full payment. "On a large construction project, you could be in for a long wait for the holdback to be released," says Armstrong. "There def- initely is a lot of demand for earlier release." The current act already contains a mechanism for early holdback release, but experts say it's inadequate. Under the act, contractors are able to issue a certificate of completion for a subcontract, which in turn allows the owner to legally reduce its statu- tory holdback fund by paying out early for completed subcontracts. However, the pro- cess isn't mandatory and many owners are unwilling to agree to early release. "In theory, there are ways to get hold- back released early, but it's very messy," says Neil Abbott, the founding co-chair- man of the national construction prac- tice group at Gowling Laf leur Henderson LLP in Toronto. In reality, he says, companies rarely use the current mechanism properly. When early subcontractors complete work, such as excavation, without deficiencies, some major developers will pay in full, says Ab- bott. But they don't always comply fully with the strict requirements of the act, po- tentially exposing themselves to legal risk should the amount of holdback become an issue further down the road. Armstrong says subcontractors also ex- pose themselves to risk because of the in- tricacies of lien preservation periods. Sub- contractors get only 45 days to preserve a construction lien after finishing their work, but with holdback funds potentially tied up for years, they need to decide whether to file a lien to protect that money or trust that they'll eventually receive payment. "Parties will often avoid doing that be- cause of the cost of filing for a lien," says Armstrong, who's nevertheless confident an expert review of the act launched earlier this year can improve the situation. "We should be looking at ways to make early release easier. There should be a clear- er mechanism for subcontractors to be paid in full throughout the project," she adds. In February, the province appointed Borden Ladner Gervais LLP partner Bruce Reynolds to assess the state of the 32-year- old legislation following complaints from industry stakeholders about the lack of prompt payments and the inef- fectiveness of dispute resolution in the con- struction world. Reynolds and his team are expected to report back by Decem- ber and, as part of their mandate, will consider "increasing the number of dates for the release/ early release of hold- back, for instance on phased projects." Other measures up for debate related to holdbacks include pro- posals to change the amount from the current 10 per cent; make the release of holdback mandatory or automatic following the expiration of lien rights; and eliminate the additional holdback for finishing work. Many of the items under consider- ation by the review have their roots in a private member's bill introduced during the last session at Queen's Park. Bill 69, the prompt payment act, received back- ing from contractor associations that ar- gue delinquent payment has become rife throughout the construction industry. Although the bill passed second reading with all-party support, it died on the or- der paper last summer when the legisla- ture dissolved for the provincial election. The bill would have required auto- matic release of holdback funds within one day of the end of the applicable lien period. That has been a point of contention because al- though holdback obli- gations end at the same time as the lien deadline passes, the act is silent on when they should be released. Keith Bannon, a part- ner with Toronto con- struction law firm Gla- holt LLP, says the review of the act represents a bet- ter option than additional legislation. "The lien act and principles are there to protect subcontractors, but sometimes it does create formalities that end up holding up their payment," he says. "I think bill 69 showed that there is a pretty strong movement for changes to the [lien act], but maybe it imposed a little too much on the statutory regime. The infor- mation package that came with the review makes it clear that they are looking for novel ways to allow money to f low through more easily. There are a lot of good solutions on the table, and I'm looking forward to seeing what happens." According to Abbott, the act is due for a fresh look. "The case law has identified some problems or at least some debate about the legislation," he says. "I think it's better to have a major over- haul rather than go on debating about which judge thinks what. A lot of lien law is also decided in arbitration, which means there isn't actually that much case law and some decisions can hang around when maybe they have passed their due date." LT I n a few short words earlier this summer, a majority of the Alberta Court of Appeal defined a legal issue that divided that appellate court. In the result, a statutory construction trust did matter — to the tune of about $1 million. The case should matter to construction lawyers across Canada, too. The court divided 2:1 on whether the Build - er's Lien Act trust was in operational conflict with the federal Bankruptcy and Insolvency Act. This is an appellate case of some significance. On the one hand, there are federal bankrupt- cy and insolvency provisions, constitutionally competent legislation, under s. 91 (21) of the Constitution Act, 1867. On the other hand, provincially defined property and civil rights are provided for under s. 92(13) of that same Con- stitution Act. Ontario, where I am based, has had its share of this provincial/federal debate in the construc- tion law context and these issues may play themselves out again when construction industry heavyweights decide to duke it out. In Ontario, the decision of Royal Bank of Canada v. Atlas Block Co. Ltd. a year ago left some feelings of un- fairness in the construction industry. The Atlas decision has been perceived by some as allowing secured credi- tors to "scoop" trust funds. In Atlas, what defeated the provincial deemed construction trust was the receiver's receipt of the funds which resulted in their being com- mingled — a "no-no" when trying to establish a trust which requires certainty of subject matter. One could hardly blame the receiver in Atlas whose BIA mandate was to seek out and receive any funds owed to the estate (regardless of who was claiming against them). A year later, the Iona case followed in Alberta and is from a higher court. Yet the Ontario Superior Court decision in Atlas can readily be distinguished. First, the provincial legislative language is somewhat different in Alberta and Ontario. Second, in Atlas the funds were commingled, albeit by the receiver, not by Atlas Block. The funds were clearly held separate in Iona. In Iona, certainty of subject matter could readily be ascertained. The Iona case also involved a dis - tinguishable gloss as the improved property was federal (no provincial liens attached), and because the claimant GCNA was a subrogee surety. The parties both conceded that the trust provisions of the Builders Lien Act were engaged. Nonetheless, the interesting issues remain. Trusts require three certainties: intention, object, and trust property. A statutory trust manifests a clear intention. And usually the intended beneficiary is clear. In most situations, only the third certainty will be in play. Whether any provincial scheme is in op - erational conflict with the federal bankruptcy regime must be determined by examining the purposes and effect of the given provincial legislation within its statutory context. It seems hard to take issue with this approach of the Iona ma- jority. The minority in Iona, citing the Supreme Court majority in British Columbia v. Henfrey Samson Belair Ltd., said that there is no trust where "money has been converted to other property" (no certainty of subject matter). However, whatever a trustee in bankruptcy is doing when collecting construction trusts, that trustee is arguably neither "converting" money, nor converting money to "other property." Perhaps there is a way out. With other cases winding their way upwards, and a dissent at the Alberta Court of Appeal in Iona, the Supreme Court may well take up someone's invitation to wade into this interesting federal/provincial issue in the construction context unless or until provincial lien act or federal insolvency reform make the issue moot. Sponsored by: By Andrew Heal Photo: Pavel L Photo and Video/Shutterstock Court issues significant ruling on construction trusts "Obviously, if everyone is solvent, nobody cares about trusts, secured interests or priorities. If everyone is solvent, nobody cares about builder's liens either." www.healandco.com BRIEF: CONSTRUCTION LAW 'The case law has identified some problems or at least some debate about the legisla- tion,' says Neil Abbott.

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