Cash Is King: Builders' Lien Security And Statutory Trusts Under Alberta's Prompt Payment And Construction Lien Act

• Law Firm: Borden Ladner Gervais LLP
• Subject Matter: Litigation, Mediation & Arbitration, Real Estate and Construction, Trials & Appeals & Compensation, Construction & Planning
• Author: Ms Patricia L. Morrison and Theron Davis
• Published date: 16 March 2023

A recent Alberta Court of Appeal decision could have a meaningful impact on the way construction industry stakeholders manage cash flow and address security for liens. In Tempo Alberta Electrical Contractors Co. Ltd. v. Man-Shield (Alta) Construction Inc. (Tempo), the Court of Appeal decided that security paid into court in accordance with Alberta's lien legislation (now, the Prompt Payment and Construction Lien Act or PPCLA), to discharge a lien may be substituted, provided there is no prejudice to the lien holder. However, where security is cash and where those funds are, by operation of section 22 of the PPCLA, impressed with a statutory trust after a certificate of substantial performance is issued, a substitution may not be appropriate.

In Tempo, The Court of Appeal continued a debate started by the Supreme Court of Canada in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel (Structal) regarding posting security to vacate liens and discharging trust obligations under builders' lien legislation. While this decision provides clarity regarding a party's ability to substitute security under the PPCLA, it demonstrates a possible trend in judicial decision-making when it comes to trust claims in the construction law context that may, in some ways, be creating a security where none expressly exists.

The key takeaways from the decision include:

1. Cash and a lien bond may be substituted provided there is no prejudice to the lien holder.
2. Where cash has been paid into court and trust provisions have been engaged, no such substitution will be allowed.
3. Parties should carefully evaluate the effect of the trust provisions under the PPCLA on the flow of payments through the contractual chain.

Facts

This issue arose in the context of ongoing litigation resulting from the construction of a seniors' care facility in Edmonton. After the subcontractor posted a certificate of substantial performance, the owner paid cash into court to obtain the discharge of the subcontractor's lien. The owner later settled with the general contractor, assigning the cash paid into court to the general contractor as part of the settlement.

The general contractor applied to replace the security in court with a lien bond. Having been successful at the lower courts, and with no application to stay the applications judge's decision, the general contractor replaced the funds in court with a lien bond prior to the Alberta Court of Appeal's decision. Accordingly, the subcontractor...