Posting Security to Get Liens Off

Suppliers, subtrades and others in the construction industry often question the potential benefit of filing a Builders Lien.  Owners and Owners, on the other hand, are often faced with having to obtain discharges of the liens in order to obtain financing or construction draws.  A recent case from our Court of Appeal highlighted issues that arise when posting security for the removal of liens. 

FACTS

A Supplier manufactured and installed windows and doors for a condominium project.  A balance of approximately $1.4 million was due under the contract.  The Supplier filed a lien in that amount.  A few days later, the Supplier filed an additional lien for extras to the contract, including costs related to delay.  The Owner sued the Supplier for breach of contract and delay, and also sought an order discharging the liens on payment of security pursuant to the Builders Lien Act.  The original judge who heard this matter concluded that overtime charges forming part of the Supplier's lien claim could not form part of the lien.  That judge further confirmed that a portion of the delay experienced by the Owner was the responsibility of the Supplier and ordered that an amount of $1,250,000 be posted, including security for costs.  Of course, this was a far cry from the total sought (being in excess of $2.1 million).

In the appeal, the Supplier sought an order that the full amount of the liens plus 10% as security for costs should be posted by the Owner.

FINDINGS

The Court of Appeal went into significant detail as to how to determine the amount of "sufficient security" as required by the Builders Lien Act.  In the past, courts simply took the amount of the liens, added an amount for security for costs (typically 10 to 15%), and ordered that the total be posted as security (using either cash, letter of credit or bond).  However, in this case the court set up a two-part test.  First, the judge must determine whether the claims advanced by the respective parties are sustainable.  If it is plain and obvious that claims, or portions of them, will not succeed, the amount of such claims will not be considered in fixing security.  Second, the Court must determine the appropriate amount of the security based on the evidence available.  With respect to this issue, the judge hearing an application for posting of security has a broad discretion to determine the amount required in order to be "fair and equitable".  Part of this process is to ensure that there is reasonable protection for those who supply work and materials to a construction project.  However, the amount of security posted may be less than the amount claimed under a lien. 

Further, and somewhat startling to construction lawyers, the court concluded that it was not necessarily the case that any amount needs to be posted as security for costs, despite the fact that it is general practice to do so.  This issue will no doubt be resolved by future decisions.

In this case, the only change made to the amount posted was with respect to the overtime claim, which Court of Appeal indicated "might" form part of the lien.  On the basis that this was potentially part of a lien, the Court of Appeal simply and somewhat randomly increased the required security to $1.5 million.

LESSONS LEARNED

  1. When in doubt, lien.  The state of law with respect to what may form part of the lien is not yet concluded.  A lien can be removed at any time, but must be filed within the applicable lien period, or it ceases to exist (at least with respect to the land).
  2. One can no longer assume that security for costs will form part of an order posting security for removal of a lien.
  3. A serious review of the amount claimed in a lien may be worthwhile in an attempt to reduce the security posted for its removal.

 

NOTE: This article was written by Robert G. Kuhn a lawyers who practices in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.