Limiting Shimco Liability

Transcription

1 Limiting Shimco Liability By Dirk Laudan September 2003 The following is an opinion based on the state of the law as it exists today. This article is not intended to be relied on and you should consult a lawyer for an opinion regarding your specific circumstances. GENERAL BACKGROUND In the case Shimco Metal Erectors Ltd. v. North Vancouver (District) (2003), 11 B.C.L.R. (4 th ) 119 (B.C.C.A.) ( Shimco ), the British Columbia Court of Appeal confirmed that the Builders Lien Act creates a statutory lien against the holdback (the Holdback Lien ) that is separate from and independent of the builders lien filed against title to land (the Builders Lien ). The Holdback Lien can arise even where no lien against title is filed, and it can persist even after the Builders Lien is extinguished. It is these characteristics of the Holdback Lien that have led to serious concerns by some owners and contractors. It is important to regard the risk of a Holdback Lien in perspective. Most unpaid subcontractors who intend to pursue their remedies, file and litigate Builders Liens, contract claims, or bond claims. Holdback Liens are generally more difficult for unpaid trades to pursue. Generally speaking, it is only where the Holdback Lien is the trade s only secured remedy that the trade will invoke the Holdback Lien as its remedy. That being said, the possibility of Holdback Liens complicates the assessment of risk in releasing the statutory builders lien holdback, and careful owners and contractors will want to assess the risks involved. This paper provides a general overview of that risk, and provides some ideas that could be used as strategies for owners and contractors in managing that risk. CALGARY MONTRÉAL OTTAWA TORONTO VANCOUVER

2 This paper is not meant as legal advice. You should obtain legal advice specific to your situation from qualified legal counsel who are experienced in construction and lien matters. THE HOLDBACK LIEN Under the 1998 BC Builders Lien Act, British Columbia has a multiple-holdback system. As a result, the owner, and all contractors and subcontractors down the contractual chain who hire other subcontractors, have to retain a 10% holdback from amounts paid under their contracts. No holdback is required, however, from amounts paid to material suppliers and consultants. Any person engaged in connection with an improvement by or under the person from whom the holdback is retained is entitled to a Holdback Lien. This means an unpaid subcontractor has a Holdback Lien against every holdback above that subcontractor in the contractual chain, all the way up to the owner s holdback from the general contractor. Technically, Builders Liens arise when a claimant is unpaid, but they are only perfected when a Claim of Lien is filed against title to land. The equivalent action by which a Holdback Lien is perfected is commencing an action in the BC Supreme Court to enforce it there s no other place to register a Holdback Lien. Unlike a Builders Lien, the Holdback Lien does not expire if it is unperfected for 45 days after substantial completion. The Holdback Lien only expires after the holdback is paid. The holdback may only be validly paid to discharge unperfected holdback liens after the 55 day holdback period, and only if no Builders Lien claim has been filed against title to the land, and no action has been commenced to enforce a Holdback Lien. This means that as long as even one Builders Lien is filed against title, or one action to enforce a Holdback Lien has been commenced, the holdback cannot be paid in such as way as to extinguish those Holdback Liens. In that case, Holdback Liens appear to last forever, perhaps subject only to the six-year limitation in the BC Limitation Act. There is a limitation on the location where a Holdback Lien action must be commenced. The action must be commenced in the registry of the British Columbia Supreme Court in the same municipality as the land on which the construction project was located, or if there is no such registry, at any registry in the same judicial district as that land. For land in the lower mainland of British Columbia, this generally means actions may be commenced in Vancouver or New Westminster. Persons concerned about Holdback Liens should remember that there is a third registry in the lower mainland (in the 2

3 Vancouver Westminster Judicial District), in Chilliwack. Holdback Lien claimants and persons concerned about Holdback Liens must take care, and seek professional advice on the correct registry to commence an action in, or to search. Absent special circumstances, the risk of a Holdback Lien is limited to the ownercontractor and to other persons who are obligated to retain holdbacks. Non-contracting owners and purchasers generally have no direct liability for a Holdback Lien. Under the former Condominium Act the BC Supreme Court held that the purchaser s holdback in the conveyance of a strata unit was subject to a lien similar to the Holdback Lien. The wording of the replacement provisions in the current Strata Property Act is different from those in the previous legislation, and the status and existence of a Condominium Holdback Lien is therefore arguable. There is no lien against contractual holdbacks kept by a purchaser of property in connection with builders lien claims. STRATEGIES FOR OWNERS There are several strategies an owner can use to reduce the potential for a Holdback Lien arising before release of the holdback. The following can be considered a checklist, beginning with the easier and less expensive strategies and moving to the more expensive and difficult. Conduct an LTO search for the property before payment of the holdback It probably goes without saying that you should conduct a Land Title search of the parcel or parcels on which construction occurred to see if any Builders Liens have been filed before releasing the lien holdback. It is worth remembering, too, that most unpaid claimants will file a Builders Lien against title, even if it is probably late, before those claimants begin an action asserting the Holdback Lien. Simply confirming that there are no Builders Liens against the relevant parcels may tell you that a Holdback Lien is unlikely, although still possible. Conduct a Court registry search before payment of the holdback Along with conducting an LTO search, you can conduct a Court registry search, in the appropriate registries where a Holdback Lien action could be validly commenced, to see if any Holdback Lien has been commenced, before releasing the builders lien holdback. 3

4 The owner can get an indemnity in its general contract Owners should consider including, in tender and general contract terms, a requirement that the contractor indemnify the owner against Holdback Liens. That indemnity would probably not protect the owner in the case of the insolvency of the general contractor, but otherwise should provide some relief against Holdback Liens from a dispute down the contractual chain. The owner should impose standard contract bond (LMP bond) requirements Owners should consider including in tender and general contract terms a requirement that the contractor post a labour and material payment ( LMP ) bond. LMP bonds permit qualified claimants generally unpaid subcontractors who have a direct contract with general contractor to claim unpaid contract claims from the surety. These bonds can provide an alternative and potentially easier method for recovery than advancing a Holdback Lien. Unpaid contractors are unlikely to advance a difficult Holdback Lien if they can be paid out by a surety. Owners might also consider including a tender or contractual requirement that the general contractor obtain LMP bonds from their principal subcontractors. Remember that sub-subcontractors are also entitled to a Holdback Lien against the owner s holdback. Obtaining LMP bond coverage for such second-tier claimants would give them an alternative to a Holdback Lien claim. Owners might consider whether broad form LMP bond requirements, providing for multiple levels of claimants. Owners may wish to consult with bonding companies or the Surety Association of Canada before putting out a tender with non-standard bond language, however. Notify subcontractors of the holdback release Before paying the holdback, owners should consider notifying the project mailing list all contractors and material suppliers known to be working on the project of the intention to release the holdback. That notice should state that if the owner is not notified of claims, the owner will rely on the silence and proceed to pay the holdback. The principal purpose of this notification is to identify any unpaid potential lien claimants to beat the bushes for potential claimants before releasing the holdback. 4

5 Require the contractor to post release of holdback bonds? On several occasions a large municipality has recently included a requirement for a holdback release bond for bidders for municipal construction projects, indemnifying the municipality from any liability arising from the holdback release. If issued, these bonds could effectively eliminate the owner s risk from potential Holdback Liens. But there are some practical problems. The surety companies are unenthusiastic about writing such bonds. Sureties standard release of holdback bonds are not available to all contractors who otherwise qualify for bonding, and are designed to permit a contractor to release the holdback into the project cash flow, not to indemnify Holdback Lien liability. Release of holdback bonds are priced as financial guarantees, higher than normal contract bonds. Assuming such bonds are available, the practical result of requiring release of holdback bonds would likely be to both increase bid prices to pay for the significant bond premiums, and to reduce the number of tenders to those qualifying for these bonds. Pay the holdback to a solicitor s trust accounts Another possible strategy for dealing with the Holdback Lien liability is to set up an arrangement where the holdback is paid into a solicitor s account on trust conditions, so it can be repaid if a lien subsequently appears. This may or may not be successful in setting up a defence to any subsequent Holdback Lien actions. Pay the money into Court If even one Builders Lien is filed against title, the owner may actually be better off! The owner is then entitled to pay the holdback into Court under Section 23 of the Builder Lien Act, thereby extinguishing the owner s liability for Builders Liens and Holdback Liens. The Owner has to pay the legal costs of obtaining the order, which in practice are generally unrecoverable. STRATEGIES FOR CONTRACTORS The strategies for contractors are similar to those for owners, above. Whether the expense or difficulties involved in pursuing such strategies are deemed to be worthwhile, will likely depend on the amount of the holdback that the contractor is required to retain from each subcontractor, and on how risk averse the contractor is. 5

6 Conduct an LTO search for the property before payment of the holdback Contractors should consider conducting Land Title searches of the relevant properties, and reviewing them to determine that no Builders Liens have been filed against title, before releasing their holdbacks. Note that where the project involves a large number of parcels (as where a large number of strata titles have been raised), obtaining and reviewing those searches may have significant cost implications. The value of taking this step will have to be weighed against the amount of the holdback. Conduct a Court registry search before payment of the holdback The general contractor should also consider conducting a registry search of actions naming it as a defendant, before releasing the holdback to a subcontractor, particularly in the case of major subcontractors. Again, there is a question of the cost-effectiveness of this precaution. Get an indemnity in your subcontract or include in your purchase order In their subcontracts or purchase orders, the general contractors should consider a requirement that the subcontractors indemnify it against any claims against the contractors or the owner s holdback. The indemnity against claims against the owner s holdback will be important if the contractors have themselves indemnified the owner for such claims. The subcontractors should consider analogous provisions in their subsubcontracts or purchase orders; and on down the line. Contract bond (LMP bond) requirements General contractors should consider requiring subcontractors to post LMP bonds, to provide a remedy for unpaid trades engaged by their subcontractors, instead of advancing a Holdback Lien claim. Some general contractors already require bonds from their subcontractors above a certain size, regardless of whether the owner requires it. Notify subcontractors of the holdback release Such notification would also assist contractors in determining whether the potential Holdback lien claimants are likely to advance claims. See above, for owners. 6

7 Release of lien bonds It appears unlikely that sureties would issue release of holdback bonds for subcontractors. Pay the holdback to a solicitor s trust accounts Contractors could also release the holdback to solicitors on undertakings. See above, for owners. Pay the money into Court If there is a Builders Lien by a subcontractor of the contractor retaining a holdback, the contractor is also entitled under Section 23 to make an application to pay its holdback into Court. STRATEGIES FOR VENDORS Vendors would only be liable for the Holdback Lien if they were also parties to a construction contract. In that case, their strategies to limit risk are as noted above under owners. Since the holdback under the Strata Corporation Act is released to the vendor, no steps to protect the vendor in connection with that release need be considered. STRATEGIES FOR PURCHASERS Purchasers are not liable for a Holdback Lien. With regard to the potential lien against the purchaser s holdback under the Strata Property Act, the purchaser may consider certain steps to limit its risk. LTO search It perhaps goes without saying that the purchaser should obtain a search of the land title office after the holdback period to confirm that no Builders Liens are filed. Court registry search Cautious purchasers should also consider obtaining a Court registry search, particularly if the holdback is sizeable. The language of the Strata Property Act may lend itself to the argument that the vendor should provide the purchaser with that search, since the 7

8 absence of proceedings against the holdback is a precondition to holdback release to the vendor. 8