Court of Appeal approves use of lien bonds as alternate security

A recent Manitoba Court of Appeal decision recognized that lien bonds are an acceptable form of alternate security for the purposes of vacating claims for lien. While the case does arise out of the more unusual context of a claim for lien against municipal land, it puts to rest uncertainty over the practice of using lien bonds in Manitoba.

In Bird Construction Group v Trotter and Morton Industrial Contracting Inc., 2023 MBCA 64, a general contractor sought to have two liens delivered by one of its subcontractors removed upon the deposit in court of lien bonds with face values equivalent to the amounts claimed in the subcontractor’s claims for lien. The subcontractor was prepared to accept a lien bond as security for one of the liens, but objected to using a lien bond as security for the other lien. The subcontractor insisted that the general contractor post cash security for that claim for lien.

The subcontractor was initially successful before the judge hearing the application, who ordered the liens to be removed through a combination of cash and lien bond security. The general contractor appealed and was ultimately successful. The Court of Appeal ordered that both claims for lien be vacated upon the posting of the lien bond security proposed by the general contractor.

This decision happened in the context of liens that arose out of a construction project on municipal land (as a result, it did not attach to the property itself). The conclusions of the Court of Appeal with respect to the adequacy of lien bonds as alternate security for claims for lien remain relevant to claims for liens that are registered against, and attach to, the property where the project is being constructed.

Acceptable as alternate security

Although it is a common practice elsewhere, the use of lien bonds as alternate security has been fairly inconsistent in Manitoba. The advantages of lien bonds, such as the relatively short turnaround time for obtaining alternate security, have been undermined at times by the insistence of some subtrades and suppliers on the posting of cash security, often for purely tactical or leverage purposes. Under pressure from owners and other trades to quickly remove a lien, contractors and subcontractors have routinely found themselves reluctantly posting cash to avoid drawn out and costly fights when a lien claimant objects to the use of a bond.

Fortunately for Manitoba’s construction industry, the Court of Appeal’s decision in the Bird Construction Group case confirms that unless there is a legitimate concern over the credit worthiness of the surety or the bond terms, lien bonds are an acceptable alternate security for claims for liens.

In addition to confirming the general acceptance of lien bonds as alternate security under The Builders’ Liens Act, the Court of Appeal confirmed that the existence of a potential trust claim under the Act is not relevant when considering the security required to discharge a claim for lien. As the Court noted, lien claims and trust claims are separate matters. For this reason, money paid into court as alternate security for a claim for lien is security for the lien claim only, not security for a possible trust claim.

The new normal in Manitoba?

Although the Court’s acceptance of lien bonds as alternate security for claims for lien does clear the way for an increased use of lien bonds, it is too early to tell whether bonds will become the new normal, or default, form of alternate security for liens. In addition to a personal preference for posting cash, there are several reasons why a contractor/subcontractor seeking the discharge of a lien might not want to provide a lien bond. These include:

  1. Unavailability of bonding. The contractor/subcontractor may not have an established bonding relationship with a reputable surety or, alternatively, may have their available bonding already committed to bid bonds, performance bonds or labour and material payment bonds.
  2. Bonding premiums. As the premiums paid for the bond are not recoverable expenses and are typically paid on an annual basis, it may not be cost effective for the contractor/subcontractor to resort to bonding if they anticipate being able to reach a quick resolution of the underlying dispute.
  3. Preference to avoid court process and procedure. The contractor/subcontractor may wish to avoid costs associated with obtaining a court order and, instead, prefer to work with the lien claimant on suitable terms for posting of cash security with their legal counsel in trust.

Key takeaway

In the absence of a legitimate concern about the creditworthiness of the proposed surety or the terms of the proposed bond, the use of lien bonds as alternate security for claims for lien is an accepted practice in Manitoba.

This article first appeared in Build Manitoba, a publication of the Winnipeg Construction Association

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.