Included in Discovery: Atlantic Education & the Law – Issue 09

Conor O’Neil, P.Eng. and Sarah-Jane Lewis

Construction lien legislation exists in every province and territory in Canada. Liens are a creature of statute introduced, at least in North America, first in the state of Maryland. The concept of early construction liens was intended to combat the issues of bad credit encountered by colonial era material suppliers who faced the new world problem of land owners with abundant land, but little cash and bad credit. Materials were expensive to transport to new remote locations and so, the legislatures of that era created liens to protect material suppliers by giving them a charge against the lands for which materials or services were supplied.

Beginning in 2016 with Ontario, every province, with the exception of Newfoundland and Labrador, has undertaken a review of its lien legislation and most have passed some legislative changes or indicated their intention to do so. New Brunswick’s Mechanics’ Lien Act is the oldest lien act still in force of any of the provinces. The Legislative Assembly of New Brunswick passed new legislation, the Construction Remedies Act (“Act”), on December 18, 2020 and the Act, with the exception of several sections, came into force on November 1, 2021, replacing the Mechanics’ Lien Act.

The new legislation is long – double the length of its predecessor. Most of the fundamental concepts remain the same. However, the Act makes significant changes with respect to entities considered “owners ” under the legislation, including introducing new holdbacks provisions and expansive trust obligations for owners. Most universities and colleges will fall into the category of an owner for both new projects and capital improvements. As of the writing of this article, the sections of the Act dealing with owner holdback trust accounts are being revised. Bill 68 was introduced on November 1, 2021, outlining minor proposed amendments to these sections.

Why the new holdback and trust provisions matter

The Mechanics’ Lien Act creates a statutory trust for all funds paid by owners on a construction project, the beneficiaries of which are the contractors and material suppliers below the owner in the construction pyramid. Importantly, under that legislation an owner is not a trustee of such funds and its obligations are largely limited to retaining the fifteen per cent statutory holdback.

Under the new legislation, the trust provisions have been greatly expanded. The construction trust will extend to owners and there have been significant changes to owners’ obligations.

Owners will be required to retain a ten per cent statutory holdback, a reduction from the predecessor legislation, until the expiry of the holdbacks period. In retaining such funds every owner must create separate holdbacks trust accounts for each improvement where the value of the contract is over $100,000. Further, the owner is required to administer the trust account jointly with the contractor as trustees and, unless ordered otherwise by the court, any payment from a holdback trust account requires the signatures of both trustees.

This is potentially administratively burdensome to owners with several projects happening simultaneously. Owners should expect to track trust information to maintain traceability of trust funds such as:

• Deposits and withdrawals to and from the account;
• Any transfers made for the purposes of the trust;
• The names of parties involved in any transaction regarding the trust; and
• The amount retained as a holdback for each contract.

Perhaps most surprisingly to some, the new legislation makes appropriation or conversion of any part of an owner’s trust a category F offence under Part 2 of the Provincial Offences Procedure Act which may include a fine of up to $10,200 and a term of imprisonment of up to 90 days.

Further, any director, officer or person, including employees or agents who have effective control of the corporation, who assents to, or acquiesces in conduct, that such persons knew or ought to have known amounts to the corporation committing a breach of trust may be personally liable to the trust beneficiaries. This effectively creates a statutory right for trust beneficiaries to personally sue such persons for breach of trust. Similar sections exist in other jurisdictions and may result in an increased risk of litigation for directors, officers and employees managing the statutory trust.

What types of projects does this apply to?

The new legislation defines an “improvement” in respect of lands as:

1. any alteration, addition or capital repair to the land,
2. any construction, erection or installation on the land, or
3. complete or partial demolition/removal of a building, structure or works on the land.

Importantly, the new legislation also clarifies that capital repairs include any repair intended to extend the normal economic life of the land, building, structure or works but do not include normal preventative maintenance.

The supply of services to an improvement also clearly includes the supply of a design, plan, drawing or specification by an architect or engineer which enhances the value of the land. In other words, owners should maintain the ten per cent statutory holdback on contracts they enter into with their consultants for building projects and capital repairs.

University obligations more expansive than colleges

Although both colleges and universities may be “owners” of improvements or projects within the meaning of the new legislation, the obligation to maintain a holdback trust account does not apply to the Crown or to local government. Although there is not a “one size fits all” answer, generally community colleges are likely to be deemed the Crown for the purposes of the Act, while the same is not true for universities. This may have a significant impact on a university’s obligations under the Act with respect to holdbacks and owners’ trusts.

Community colleges in New Brunswick are Crown corporations. They are creatures of statute and subject to the New Brunswick Community Colleges Act (“NBCAA”). Under section 8 of NBCAA, community colleges are clearly defined as agents of the Crown.

Universities in New Brunswick are not subject to legislation similar to the NBCCA, are self-governed, and are not expressly legislated as Crown agents under the Act. As such, the expansive definition of improvement makes it likely that universities, which typically make dozens of capital repairs above and beyond $100,000 in the run of a year (e.g. replacing a gymnasium floor, renovations to dormitories, building or modifying laboratories, etc.), will likely be faced with creating and maintaining separate holdback trust accounts for each improvement contract, and will be subject to the corresponding obligations under the Act. Further, as noted above, both the university as a corporation, and those of its individual directors, officers and employees who have responsibility for the management of the holdback trusts, may be held personally liable for appropriation or conversion of any part of the trusts.

How Stewart McKelvey can help

Stewart McKelvey can assist universities and colleges with reviewing and drafting procedures and construction contracts to best manage the risks inherent in the new legislation. In the event of a dispute, Stewart McKelvey’s dispute resolution team has extensive experience in dealing with all forms of dispute resolution across the Atlantic region and beyond.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact a member of our Education group.

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