Canada: Can Cash Paid Into Court Be Substituted With Lien Bond After Project Completion: Alberta Court Of Appeal Clarifies

In Tempo Alberta Electrical Contractors Co. Ltd. v. Man-Shield (Alta) Construction Inc., 2022 ABCA 409, the Alberta Court of Appeal clarified that, based on a collective reading of section 48 and section 22 of the Builders' Lien Act  (Alberta) (now renamed the Prompt Payment and Construction Lien Act) (the “Act”), a lien bond cannot be substituted for cash paid into Court where a Certificate of Substantial Performance for the construction project has already been issued. Doing so would disrupt the flow of funds within the construction pyramid, violate trust conditions imposed by virtue of section 22 of the Act and cause potential prejudice to the lien-holder.

Background

The dispute arose from the construction of a senior's care facility in Edmonton between 2015 and 2017. The project owner, Shepherd's Care, hired Man-Shield (Alta) Construction Inc. (“Man-Shield”) as the general contractor, who subcontracted electrical work for the project to Tempo Alberta Electrical Contractors Co. Ltd. (“Tempo”). The project was delayed by 45 weeks. Man-Shield and Tempo registered builders' liens against the project property. The liens were registered in February and June 2017, but were preceded by the issuance of a Certificate of Substantial Performance by Tempo in December 2016. Tempo's first builders' lien was removed from title by a Court Order of February 2017, when Man-Shield was permitted to deposit a lien bond in Court as replacement security for the land. Tempo's second builders' lien was removed from title by way of a Consent Order of June 2017, after Shepherd's Care deposited $1,199,439.15 in Court as security in lieu thereof (“Cash Security Deposit”).

Man-Shield and Shepherd's Care settled their dispute in February 2018, and, as part of the settlement terms, Shepherd's Care assigned to Man-Shield its right to the Cash Security Deposit as part payment of amounts owed to Man-Shield. In May 2020, Man-Shield filed an emergency application seeking access to the Cash Security Deposit and to substitute it with a lien bond of the same amount, citing cash flow difficulties owing to the COVID-19 pandemic. This was allowed by the Applications Judge. Tempo appealed in Chambers against the Order of the Applications Judge, albeit unsuccessfully, thus leading to a further appeal by Tempo to the Alberta Court of Appeal.

Applicable legal provisions

The Alberta Court of Appeal analyzed section 48(1), which allows the removal of lien registration in lieu of security or payment of cash in Court, in light of the trust conditions created pursuant to section 22, which imposes restrictions on the access to and use of “trust money” when such money is paid into Court after the issuance of a Certificate of Substantial Performance. Notably, section 48 is silent on whether security for payment can be substituted once the lien has been discharged.

Decision

The Court of Appeal surmised that although section 48 of the Act permits the substitution sought by Man-Shield, this is not an unconditional blanket permission. The substitution can only be allowed if there is no demonstrable prejudice to the lien-holder.

The Court of Appeal, on a collective reading of the enabling language in section 48 and the prohibitory language in section 22, concluded that the trust obligations in section 22 applied to the present situation. The effect was to create a statutory trust in respect of the Cash Security Deposit, since it was paid into Court after the filing of the Certificate of Substantial Performance. The Court observed that “the key point in this factual matrix is that at the time of Man-Shield's application, the project was completed and Tempo had issued a certificate of substantial performance.” As argued by Tempo, the trust necessitated that the funds representing the Cash Security Deposit remain within the “contractual chain” and not be utilized in any other manner.

Accordingly, the Court of Appeal held that the courts below had erred in their decisions to allow Man-Shield to access all of the Cash Security Deposit by way of the substitution. To this extent, the appeal was allowed.

Conclusion

The result of the interplay of the lien removal provisions in section 48 and the trust provisions in section 22 is a prohibition on substitution of security money paid into Court with a lien bond after the project has been completed, so as to ensure that trust funds do not get diverted from the construction pool and remain available for payment to unpaid sub-contractors and suppliers. Allowing such substitution could cause substantial prejudice to the lien-holder. The decision of the Alberta Court of Appeal emphasizes an interpretation of the Act which prioritizes preserving the security to which lien-holders are entitled.

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