Court of Appeal Expands Trust Rights under Manitoba Builders’ Liens Act

This post was written prior to our January 2017 merger, under our previous firm name, Aikins, MacAulay & Thorvaldson LLP. 

Author: Betty A. Johnstone

The Stuart Olson Dominion v. Structal Heavy Steel decision just issued by the Manitoba Court of Appeal [2014 MBCA 8] considered novel arguments and has shifted the legal landscape for project lenders, owners and all other participants in Manitoba’s construction industry.

The case involved disputes between a general and a subcontractor on the Winnipeg stadium project. Large amounts were at issue. Near the end of the project, the general contractor, SOD, sought to set-off certain cost claims against money otherwise due to its subcontractor, and Structal then registered a claim for builders’ lien for in excess of $15 million. SOD applied to Court for an order vacating Structal’s lien. Structal approved the form of lien bond SOD sought to post to secure the full value of the lien and Structal voluntarily discharged its lien. In the normal course, project funds would thereby have been freed to flow so that SOD and other subtrades and suppliers could have completed their work and been paid the remaining balance of the contract price.

After the lien bond was posted, however, Structal did not pursue the normal course which would have seen it issue a statement of claim and start down the litigation path seeking to prove entitlement to payment of the full or some lesser amount of the $15 million security posted to fully “protect” its position pending judgment. Instead, Structal asserted that any further advance of project funds by the owner would constitute a breach of trust under section 4 of The Builders’ Liens Act (the “Act”). Structal claimed that it still had a ‘“beneficial interest” in unpaid project funds which operated in addition to its fully secured lien rights. The owner stopped all further payment to SOD pending clarification of its legal obligations in this peculiar situation.

SOD applied to the Court of Queen’s Bench for an interpretation of relevant provisions of the Act. The motion court judge hearing the Application in the first instance determined that posting of the lien bond satisfied SOD’s trust obligations to Structal so that duplicate security for Structal’s unproven claim was not called for by the Act [2013 MBQB 49, 289 Man. R. (2d) 194].  The judge looked to the purpose and intent of the legislation. He observed that never before had a judgment suggested that double security need be posted. He further stated that it would be commercially unreasonable and contrary to the intention of the legislation to require SOD to secure both a lien claim and a trust claim.

The motion court judge did not observe, but the fact is that both the lien and the trust “remedies” Structal sought to exercise under the Act arise from a single, unproven debt claim for some $15 million. The Act does expressly provide the right to lien or charge and obtain “security” against title to the land, the holdback account and any amount of the project funds caught in the payment stream at the time the lien is registered, up to the value of the lien. Conventional practice has allowed a duly perfected lien right to be vacated from the land, holdback and trust funds yet to be paid upon posting alternate security [often in the form of a lien bond] to instead stand in court under section 55 of the Act.

A proven breach of trust claim entitles the claimant to obtain judgment and possibly trace misappropriated project funds even after they have been disbursed to persons who have not contributed to the improvement of the subject owner’s land. The Act does not set out a right to pre-judgment security for an alleged trust claim prior to judgment. The Act does not say that a person allegedly owed money on a construction project is entitled to double protection for its unproven debt claim. In the present case, if and when the indebtedness of SOD is proven, a judgment will issue against SOD. If SOD defaults and for any reason fails to pay that judgment, its surety company stands ready under the lien bond posted to pay 100% of SOD’s proven indebtedness to Structal, up to the value of the lien claim registered.

Structal appealed to the Manitoba Court of Appeal. The motion judgment was overruled and set aside on the basis of a finding that the posted lien bond did not satisfy SOD’s trust obligations so that upon receipt of any further trust funds for the project, SOD could not disburse them without being in breach of trust.

The implications of this most recent interpretation of legislative intent are significant.

How the industry may respond and what arguments may issue from lawyers representing competing and common interests of owners, potential lien and trust claimants is yet to be determined. Disposition of lien claims has certainly become more complicated and potentially more costly for all parties concerned.

Additional issues relevant to detailed disputes between the parties were also determined by the Court of Appeal. No mention of these further issues is warranted here, given the narrow focus of this Case Comment.

This article was originally published in Upword, Issue 1, Edition 2014.

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.

Betty A. Johnstone is a partner at Aikins Law and head of the Construction Law department.