Chapter 7: Holdbacks and the Limited Recovery/Liability Principle

7.1 | What is the limited recovery principle referred to earlier?
Limited liability and recovery

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 holdback.

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.

34 (1) The maximum aggregate amount that may be recovered under this Act by all lien holders who claim under the same contractor or subcontractor is equal to the greater of

(a) the amount owing to the contractor or subcontractor by the
person who engaged the contractor or subcontractor, and
(b) the amount of the required holdback in relation to the contract between the contractor or subcontractor and the person who engaged the contractor or subcontractor.

The principle of limited recovery is also reflected in sections 23, 36, 37 and 38.

An example of the application of section 34(1) is set out in Figure 7 .

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).

The reference to “recovered … by lien holders” is also significant in limiting the application of section 34. Claims under the deemed trust created by section 10 are not limited by section 34.

[See section 10 and chapter 12]

7.3 | Does “amount owing” in section 34(1)(a) have any special meaning?
“Amount owing”

Commentary: yes. Section 34(2) sets out three things that do not operate to reduce the amount owing for the purposes of that provision:

(1) Amounts asserted as a counterclaim
(2) a payment made after the filing of a lien by a person claiming
under the person to whom the payment is made
(3) a payment made in bad faith

7.4 | What is meant by counterclaim?
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?
“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?
Payment after lien filed

Commentary: no. The size of the lien is relevant to the calculation. Section 34(2)(c) provides:

34(2) For the purposes of subsection (1) (a), …

(c) a payment to a contractor or subcontractor by the
person who engaged the contractor or subcontractor
that is made

(i) after a claim of lien has been filed by a lien
holder claiming under the contractor or
subcontractor,
(ii) if the person has actual notice of the claim of
lien, and
(iii) if the claim of lien has not been removed or
cancelled from the title to the land, under
section 23 or 24 or otherwise, at the time the
payment was made,

does not, to the extent of the lien, reduce the amount owing to the contractor or subcontractor by that person.

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.