In the Trenches

By Scott Fairley, Partner

During the summer months construction projects are in full swing.  As the construction season progresses and projects near completion, the time comes when contractors and subcontractors start to review their accounts and start to ask questions such as: When can I expect to receive my final draw?  Am I going to get paid?  Do I need to register a construction lien?  While the hope is that full payment is made on all projects, it is worthwhile to take some time to be prepared to protect your interests as project move towards completion, in case funds don’t flow.  The following is an outline of various items to consider in determining if you are prepared for the possibility that you may have to take steps to get paid, with particular reference to Construction Lien Act issues:

• Has a certificate of substantial performance been published for the contract under which you are working.  If so, it can affect the deadline for registering a claim for lien.  The time to register a claim for lien runs from the last supply / completion date or the date of publication of a certificate of substantial performance, whichever is earlier.  It is up to you to keep track of whether certificates are published on your projects.  Refer to the following website to review published certificates:  http://www.dcnonl.com/csp/
• If you have contracted directly with the owner of the land, the 45 day time to register a lien begins to run on the date on which you completed or abandoned the project, unless a certificate of substantial performance was published prior to that date, in which case the date of publication governs.    
• If you are a subcontractor, the 45 day period begins to run on the date of last supply of services or materials, unless a certificate was published prior to that date, in which case the date of publication governs. 
• A lien exists once materials or labour are supplied to a project.  To keep a lien, it must be “preserved”  by registering it on title and “perfected”  by commencing a court action or sheltering under another perfected lien.  If a lien is lost it cannot be revived.
• Are you aware of the proper legal name of the party with whom you have contracted?
• Are you aware of the name of the owner of the project and the municipal address to allow title searches to be completed?
• If possible, you should obtain the proper legal description of the project to ensure that you are able to register your lien on the correct property. 
• Have you calculated the amount owing, and to be included in the lien, without interest?  The Construction Lien Act does not allow you to lien for interest, so it will be necessary to be able to separate the principal amount of the account.
• Is there a Labour and Material Payment Bond against which you could advance a claim

The above information will be useful in expediting your claim and ensuring that you do not run out of time before a claim for lien is registered. 

The trust provisions of the Construction Lien Act (“The Act”) can provide an effective way to pursue repayment of an account even after the time to register a lien has lapsed.  Essentially, the funds that are intended for the financing of an improvement are deemed to be trust funds that cannot be used for any purpose other than to fund the project.  The trust provisions can be used to avoid or minimize the impact of having the person who owes money on a construction project going bankrupt.  A breach of trust action can be allowed to continue against a person even if he or she has filed for bankruptcy prior to or during the lawsuit.     The trust provisions of the Act also allow a party to pursue payment from a director, officer or certain employees of a debtor company personally in appropriate circumstances.  These provisions can also provide a creditor with the right to trace the trust funds into other property that was purchased with trust funds.  In light of recent economic performance and the increasing number of bankruptcies, breach of trust is a potential remedy that should be considered. 

It is important to note the trust claim is an additional remedy to the lien on the land and the charge on the holdbacks.   Breach of trust must be pursued through a separate law suit and cannot be joined together in a lien action.  The separate action can be commenced against the debtor as well as the director, officers or employees having effective control of the company’s activities. 

Requirement of An Improvement 

To benefit from the trust provisions the plaintiff (the person bringing the law suit) must be someone who was entitled to a lien.  The claimant must prove that there was an improvement and that a supply of labour or material was made.  It is necessary to establish a link between the materials and an improvement, although it may not be necessary to prove that the supplier intended for a supply to be incorporated into a known and specific project.  It is a good practice for a supplier to ensure, to the extent possible, that purchase orders or other documents reflect the address and project to which the equipment or services are going to avoid uncertainty. 

It is the plaintiff’s onus to prove the existence of a trust. Once this is done, the onus shifts to the defendant to show that it applied funds in a manner that is consistent with the trust.  So, if a defendant can demonstrate that payments were made out of the trust funds to a proper beneficiary of the trust, there is no liability. Thus it is not a breach of trust to pay subcontractors and supplier on Project A with trust funds received on Project A, even if there is not enough to pay everyone.  However, it is a breach of trust for a trustee to pay itself, fund a personal expense, or pay its own overhead before making payments to the beneficiaries of the trust.  It is important that a trustee keep good records of the money flow on a project in order to be able to satisfy this onus if it is called upon to do so.