Court Confirms Holdback Liens May Be Removed In Exchange For Security
The Builders Lien Act, R.S.B.C. 1996, c. 45 (the “Act”) provides a means for workers to secure payment of a claim against lands which have been improved by their materials or labour. However, in Shimco Metal Erectors Ltd. v. Design Steel Constructors Ltd., 2003 BCCA 193 (“Shimco”) the British Columbia Court of Appeal confirmed that the Act also authorizes contractors and owners to make a claim of lien against any holdback funds retained pursuant to the Act separate from any claim against land. This separate lien has become known by lawyers as a “Shimco lien” or a “lien against the holdback”. The Shimco decision transformed builders lien practice in British Columbia and practice issues regarding holdback liens arise continuously.
For example, Preview Builders International v. Forge Industries Ltd., 2013 BCSC 1532 (“Preview v. Forge”) the court was required to consider whether section 24 of the Act, which authorizes a person to apply to court to remove a claim of lien in exchange for giving sufficient security for the payment of the claim, authorizes the court to dispose of a holdback lien in exchange for security.
In Preview v. Forge, the Petitioner, Preview Builders International Ltd. (“Preview”), was a general contractor for a civic construction project (the “Project”) in Dawson Creek, British Columbia (the “City”). The Respondent, Forge Industries Ltd. (“Forge”), was engaged by Preview to carry out structural welding on the Project. Preview alleged that Forge failed to build to specifications and refused to pay some of Forge’s invoices. Consequently, Forge liened the Project.
Preview successfully applied under section 24 of the Act to cancel the claim against the Project in exchange for a lien bond to replace the security of the land that the order had discharged. Before any holdback funds were released to subcontractors, Forge started a separate action claiming a lien against the holdback funds and judgment for the work which it allegedly performed. This caused the City to refuse to release the holdback funds for concern of contravening the Act, which prohibits an owner from releasing holdback funds once an action to enforce a holdback lien has commenced. Preview needed the holdback funds to pay waiting subcontractors.
Preview applied to remove the holdback lien, arguing that Forge had, effectively, secured its claim twice – once against the lien bond, and once against the holdback funds. Forge argued the Act afforded no means of discharging a holdback lien upon posting of security and, therefore, that the lien bond stood as security for the claim against the Project but not for the claim against the holdback funds.
The court held that a holdback lien could be disposed of in exchange for security if certain conditions were met. The court acknowledged that, strictly read, the Act prohibits the release of holdback funds which are subject to a holdback lien. However, the Act is subject to the Supreme Court Civil Rules, B.C. Reg. 168/2009 (the “Rules”) which allow the court to “summarily dismiss” (i.e., quickly dismiss without trial) whole claims or parts of claims upon application. The court held that if the court summarily disposed of that part of the action by which the plaintiff sought to enforce the claim against the holdback, any obstacle to the release of holdback funds would disappear. The court established a set of conditions upon which an owner would release holdback funds which are subject to a holdback lien:
1. If a contractor obtains a court order on summary hearing that dismisses or otherwise disposes of the portion of the claimant’s civil claim that seeks to enforce the holdback lien; and
2. the contractor provides security acceptable to the parties or the court to substitute for the security of the holdback lien; and
3. no other lien claimant has commenced an action or meanwhile filed a timely claim of lien against the land; then
4. the owner may release the holdback.
The court’s approach in Preview v. Forge demonstrates its willingness to look beyond the plain wording of the Act to craft a practical and fair resolution which gives effect to the Act’s intent by limiting a subcontractor’s ability to use a holdback lien as a means of attempting to force a resolution of its claim by applying economic pressure to the owner and other subcontractors waiting for payment.
Mark Danielson can be reached at (250) 869-1284 or firstname.lastname@example.org.