Holdbacks and the Limited
Recovery/ Liability Principle
|7.1||What is the limited recovery principle referred to earlier?|
|Commentary: as described earlier, an important reason for adopting the multiple holdback scheme in the 1997 Builders Lien Act is to encourage the flow of money down the pyramid from top to bottom. Properly implemented, the scheme discourages contractors from retaining unnecessarily large holdbacks from their subcontractors. This can only be done by limiting the liability, under the Act, of contractors and subcontractors who retain the required holdbacks.
Limited liability for one group of persons, however, necessarily requires that there be limited recovery under the Act by other groups of persons. A rigorous statement of the limited recovery principle is set out in section 34.
|7.2||The amounts described in paragraphs (a) and (b) of
section 34(1) may be substantially smaller than the amounts
actually owing to the lien holders. Does this mean
they are not entitled to recover the amounts owing to them?
Significance of “recovered
under this Act”
|Commentary: it is important to note the words “recovered under this Act” in the opening flush of section 34(1). This refers to amounts that may be recovered by asserting lien rights. Amounts recovered by lien holders from the persons who actually engage them are recovered under the terms of the contract or subcontract rather than “under this Act” and are not subject to the limitation set out in section 34(1).|
|7.3||Does “amount owing” in section 34(1)(a) have any
|Commentary: yes. Section 34(2) sets out three things that do not operate to reduce the amount owing for the purposes of that provision:
|7.4||What is meant by counterclaim?|
|Commentary: an example of a counterclaim might be where a contractor has engaged the same contractor on two different projects. On project “A,” the contractor owes a subcontractor $100,000. However, on project “B,” the work of the subcontractor resulted in certain deficiencies which cost the contractor $20,000 to remedy. The contractor would like to assert that the amount owed to the subcontractor is only $80,000 because of the claim for the deficiencies. The Act does not permit this. The contractor cannot take into account the amount of the counterclaim to reduce the amount owing to the subcontractor for the purposes of section 34(1).|
|7.5||When might a payment be made in bad faith?|
|Commentary: the concept of bad faith might apply in a number of circumstances. One example might be a payment made by a contractor to a subcontractor knowing that the subcontractor will divert the payment to satisfy claims that are unrelated to the project rather than paying the persons engaged on the project. A payment in those circumstances would probably be held to be one made in bad faith which does not reduce the amount owing to the subcontractor for the purposes of section 34(1)(a).
Normally, the use of the payment by the subcontractor to satisfy claims unrelated to the project would also constitute a breach of the trust imposed by the Act.
[See chapter 12]
|7.6||Is every payment made after a lien has been filed under
the person to whom the payment is made a nullity for
the purpose of calculating the amount owing?
|Commentary: no. The size of the lien is relevant to the calculation. Section 34(2)(c) provides:
The words “to the extent of the lien” define the amount of the reduction. For example, if a payment of $100,000 was made after a lien for $25,000 was filed, the “amount owing” under section 34(1)(a) would be reduced by $75,000. If a payment of $25,000 was made after a lien had been filed for $50,000, the “amount owing” would not be reduced at all.
It is important to note that the person making the payment must have actual notice of the claim of lien before this provision operates to nullify or reduce the effect of the payment. In this context, notice is synonymous with knowledge. The mere act of filing a lien claim, without more, does not constitute actual knowledge.