Canada: B.C. Court Of Appeal Refuses To Expand Shimco Builders Lien Liability

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Construction, March 2011

On January 27, 2011, the British Columbia Court of Appeal (the Court) released its decision in Wah Fai Plumbing & Heating Inc. v. Ma. In its decision, the Court refused to expand the reasoning in the Shimco case, resolving some of the uncertainty that many legal commentators have objected to and reinforcing the importance of making timely lien claims.

FACTS

The dispute in this case related to a home renovation project. The owners of the home (the Owners) contracted with True Art Construction and Renovation (the Contractor), and the Contractor in turn hired Wah Fai Plumbing and Heating (the Subcontractor) to provide plumbing services to the project.

The Owners had paid the Contractor the total amount owing to it by the time the Contractor abandoned the contract. The Owners did not retain a holdback as required by the B.C. Builders Lien Act (the Act).

The Subcontractor was not paid the full amount owing under its contract with the Contractor and the Subcontractor filed a lien against the land. It is a requirement under the Act that lien claimants perfect their liens against the land by commencing a proceeding to enforce the claim of lien and by filing a certificate of pending litigation within one year of substantial completion.

While the Subcontractor did commence an action within one year, it did not seek to enforce its claim of lien in that proceeding, nor did it file a certificate of pending litigation. As a result, the Subcontractor's lien against the land was extinguished at law by the passage of the one-year period. After its lien claim against the land was extinguished, the Subcontractor amended its statement of claim to assert a lien against holdback, among other relief.

DECISION

The Court of Appeal reviewed its decision in Shimco Metal Erectors Ltd. v. North Vancouver (District). It was in that case that the Court first interpreted the Act as providing for a lien against the holdback, separate from the lien against the land. A lien against the holdback is not extinguished at the same time as a lien against the land. Under the Act, holdbacks must be retained until 55 days after the completion, abandonment or termination of the relevant contract. If a proceeding is commenced to enforce a lien against the holdback before that period expires, the holdback may not be paid out. Liens against the holdback are sometimes referred to as "Shimco liens", given their genesis.

Following its review of Shimco, the Court summarized some of the critical commentary that the legal profession has made of the dual-lien theory. In general, the concerns raised by practitioners have centred on the fact that the holdback lien appears to be governed by different rules than the lien against the land, and those rules are uncertain. The British Columbia Law Institute has recommended legislative amendments to abolish the holdback lien. The Court held that this response from the profession suggests "a cautious approach" to any extension of the reasoning and result in Shimco to other cases.

In Shimco, the owner retained a holdback and the plaintiff commenced proceedings to claim a lien against the holdback retained by the owner prior to the extinguishment of its lien against the land and prior to the holdback funds being released. Conversely, in this case, the Owners did not retain a holdback from their payments to the Contractor, and the Subcontractor did not commence proceedings to enforce a lien against the holdback prior to extinguishment of its lien against the land. Further, the holdback period had expired, and had the Owners retained a holdback, they could have lawfully paid it out prior to the filing of the amended claim, extinguishing the appellant's lien against the holdback.

The Court held that Shimco does not deal with these circumstances. Further, in the Court's view, the Act cannot be interpreted to provide that where a holdback has not been retained, or has wrongfully been paid out, a person whose lien against the land has been extinguished can later commence proceedings to enforce a lien against a non-existent holdback. The Court held that the Subcontractor did not have any right under the Act to enforce its lien and there was no reason to extend the reasoning in Shimco to these circumstances.

The Court stated that the fact that there was no holdback was the principal difference between this case and Shimco. Where there is no holdback fund to claim against, no lien claim against the holdback can be made.

The Court did recognize that the non-existence of the holdback was due to the Owners' failure to comply with the Act, but noted that is the result of the wording of the legislation, which the legislature has the power to remedy.

CONCLUSION AND IMPLICATIONS

Ultimately, this case may be more significant for its commentary on the uncertainties created by the duallien system; however, the Court did provide some clarification on how Shimco liens operate.

The Court made clear that a Shimco lien is extinguished upon distribution of the holdback. The Court further clarified that the lien claim against the holdback is not an in personam right that follows the person responsible for retaining the holdback. The lien attaches to the holdback fund only. Owners and contractors required to retain a holdback must still be diligent in following the provisions of the Act in order to avoid losing the holdback defence or encountering a breach of trust claim.

For contractors and subcontractors that have not been paid and who seek to secure their claims under the Act, they must remain attentive to the timelines in the Act. In order to preserve their right to a lien against the holdback, contractors should seek to commence a proceeding to enforce that lien prior to expiration of the holdback period.

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