A recent case from the British Columbia Court of Appeal highlights the ever-present risk of money held as holdback being used for other purposes. Can the Builders Lien Act hold back monies be used to remedy deficiencies, pay damages, or be retained for other purposes? The answer is “Maybe.”

Facts

A general contractor was hired under a separate contract to construct foundations, a parking structure, and other concrete work on a project. It then went on to complete the remainder of the project under a second contract. A holdback account was created under that second contract, and all potential lien claimants were paid from it, leaving a balance of $480,000 payable to the general contractor. However, the owner alleged that it had suffered significant damages on the concrete work, the first contract. The general contractor applied to court to have the $480,000 paid out to it.

Findings

On appeal from an initial decision of the British Columbia Supreme Court, the Court of Appeal held that the monies in a holdback account are available, despite the fact that they are trust monies, to satisfy claims of the owner once all lien claimants below the contractor have been satisfied. In this case, the fact that the owner’s claims arose under a separate contract (the concrete work agreement) did not have any effect on the ability of that owner to “set off” against the monies owed to the contractor out of the second contract holdback account.

There are several types of “set off.” It is a “legal set off” when it arises on exactly the same contract. That is, if there were only one contract and the owner was claiming deficiencies or delay damages against the general contractor on that contract, this would constitute legal set off. However, the fact that the set off arose between the same parties but on a different contract, or even on a different legal basis (such as negligence, breach of statutory obligations such as environmental liability, or otherwise) does not eliminate the ability to claim against the holdback monies. Where the parties are the same and the conflicting claims to the money are “related” (as would be the case if the work was done on the same site), the principles of “equitable set off” apply, as they did in this case.

Lessons Learned

It may be a surprise to some in the construction industry, but holdback monies, thought to be held in trust, are available to satisfy back charges, set off claims, counterclaims, or other unquantified demands or allegations. You might want to consider the following:

1. Subcontractors awaiting release of their holdback monies are in the same position as the general contractor was in this case. The holdback is subject to back charges and set off claims.

2. One option to protect yourself is to ensure that the holdback monies are paid into a lawyer’s trust account (either from the beginning or upon reaching substantial completion) with express, irrevocable instructions to pay out the holdback monies on the 56th day after substantial completion, provided no liens arise.

3. Ensure that each contract identifies the obligation of the parties controlling the holdback monies so that it does not permit retaining those monies on account of back charges, set off, or counterclaims.

4. Ensure that each contract requires that all interest earned on holdback accounts is payable from the beginning of the account to the party entitled to the money at the end (otherwise the owner has the benefit of that money until expiry of the lien holdback period). BK

This article was written by Robert G. Kuhn, a lawyer who practises in construction law at the law firm of Kuhn & Company, 320 - 900 Howe Street, Vancouver, BC V6Z 2M4. Tel: 604.682.8868. Toll-free: 888.704.8877. This article 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 or email <bkuhn@kuhnco.net>.