Holding Up the Release of the Holdback

It is well known in the construction industry that a separate lien claim exists against the holdback fund created by section 4 of the Builder's Lien Act (the "Act"). Liens against the holdback, commonly referred to as "Shimco liens", provide an important source of security for unpaid subcontractors where the time period for filing a lien against land has expired. However, because any holdback funds paid out in bad faith after a lien claim has been filed will not reduce a party's liability under the Act, holdback funds are frequently withheld until all liens have been discharged. The practical effect of the Shimco lien, therefore, is often to "hold up" construction capital necessary to pay other subcontractors. The court addressed this problem in the recent decision of Preview Builders International Inc. v. Forge Industries Ltd. by clarifying that holdback funds can be released under the Act where a court order has been granted exchanging a lien bond for the Shimco lien.

Facts

Preview Builders International Inc. ("Preview") acted as the general contractor to renovate a municipal building (the "Project") on lands (the "Lands") owned by the City of Dawson Creek (the "City"). Forge Industries Ltd. ("Forge") was subcontracted to carry out the structural welding for the Project. A dispute arose between Preview and Forge in regards to the actual amounts payable under the subcontract, and Forge filed a lien claim in the amount of $234,657.92 against the Lands. Preview successfully applied under s. 24 of the Act to discharge Forge's lien, on the condition that a lien bond be deposited with the Registrar to secure the amounts claimed by Forge.

Following the discharge of the lien, Forge commenced a separate action claiming entitlement to the holdback funds retained by the City (the "Shimco Lien"). The City issued a certificate of completion for the Project, but refused to release any holdback monies to Preview until the Shimco Lien had been discharged. Preview petitioned the court for an order that the City could release the holdback funds to Preview upon its depositing an additional $15,026.05 with the Registrar, which amount, along with the lien bond, fully secured Forge's claims.

Issues

Can holdback monies be released despite the filing of a Shimco lien where the lien claim is fully secured by a lien bond?

Court Decision

Section 24 of the Act creates a specific process by which a lien claim against land can be substituted for a lien bond. There is no similar process created by the Act for the discharge of a Shimco lien. As a result, counsel for Forge argued that the court had no power to order the City to release the holdback funds to Preview, as this would effectively discharge its Shimco Lien. Accordingly, Forge argued that the City was required to retain the entire holdback until its claim was dealt with. Practically speaking, this could have prevented a number of Preview's other subcontractors from getting fully paid until Forge's lawsuit was resolved.

The court rejected Forge's arguments. Recognizing the expensive and time-consuming nature of the litigation process, the court found that allowing parties to hold up large flows of construction capital pending the resolution of a lawsuit would not be a workable approach. The purpose of the Shimco lien was to provide security for unpaid lien claimants, not to create a process for subcontractors to gain an "unfair advantage" by effectively preventing other subcontractors from gaining access to holdback funds even where their claim was fully secured. The court reasoned that a flexible approach allowing substitution of a lien bond for a claim against the holdback would be to the benefit of all parties in the construction pyramid. Despite the absence of a specific process under the Act for discharging Shimco liens, it was within the court's jurisdiction to order substitution of alternative security for a Shimco lien.

Lessons Learned

If a Shimco lien is "holding up" the flow of capital on your construction project, consider the possibility of petitioning the court for an order that a lien bond be posted as security to discharge the Shimco lien.

 

This article was written by Ian Moes and Andrew Delmonico, lawyers with the law firm of Kuhn LLP. It is only intended as a guide and 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 Ian or Andrew at 1-888-704-8877.