The Builders Lien Act, S.B.C. 1997, c. 45 (the “Act”) and the well known Shimco case provide that the holdback required to be retained on construction contracts is subject to a lien. The holdback lien is claimed by way of a Supreme Court action but there is no express provision in the Act stipulating the time limitation within which an action to claim a holdback lien can be commenced.

We have seen trade contractors claim a holdback lien against owners and developers of lengthy or multi-phased construction projects even years after the work was completed or abandoned.

In a recent decision from our Court of Appeal, Wah Fai Plumbing & Heating Inc. v. Ma, 2011 BCCA 26, a Subcontractor sought to claim a holdback lien (the “Holdback Lien”) in circumstances where no holdback was retained by the Owner. The Subcontractor filed a lien for unpaid plumbing services (the “Work”) within the 45 day time limitation set out in the Act (the “Land Lien”). The Subcontractor commenced an action in breach of contract nine months later (the “Action”) and did not refer to the Land Lien or the Holdback Lien and failed to file a certificate of pending litigation. As the Subcontractor did not perfect its Land Lien, it was extinguished on the one year anniversary of its filing. In 2006, almost five years after the Work was completed, the Subcontractor amended the Action and claimed the Holdback Lien.

Trial Decision

The trial judge rejected the Holdback Lien on the basis that the Subcontractor waited too long. By way of background, the holdback can be paid out 55 days after completion, abandonment or termination of the project unless, in the meantime, a land lien is filed or a holdback lien is claimed. Here the trial judge held that the Owner would have been able to pay out the holdback funds, had the Owner kept same, when the Land Lien was extinguished and there was no claim in the Action for the Holdback Lien.

Appeal Decision

The Subcontractor appealed and the Court of Appeal had an opportunity to review its decision in Shimco. In that case a subcontractor failed to perfect its lien against the land but the Court of Appeal held that, notwithstanding, the subcontractor’s lien against the holdback continued to exist because the action to enforce the holdback lien was commenced prior to the holdback being paid out.

The Court of Appeal in this case considered the concerns that were raised after the Shimco decision that the holdback lien created uncertainty around the maintenance and release of holdbacks. The BC Law Institute recommended legislative amendments to abolish the holdback lien and warned to only extend Shimco to other cases with caution.

The Court of Appeal held that when the Subcontractor failed to commence proceedings to enforce the Holdback Lien, the Owner could have lawfully paid out the holdback, extinguishing the Subcontractor’s Holdback Lien. The Court of Appeal clarified that where there is no holdback, or a holdback has been wrongfully paid out, a person whose land lien has been extinguished cannot later commence proceedings to enforce a lien against a nonexistent holdback.

The Subcontractor argued that there was no limitation in the Act for enforcing the Holdback Lien, subject only to the holdback being paid out or the six-year limitation period under the Limitation Act, R.S.B.C. 1996, c. 226. It claimed that its amendment to the Action in 2006 was sufficient to retroactively perfect the Holdback Lien.

The Court of Appeal found no authority for these arguments and held that the Act does not provide for enforcement of a holdback lien where there has been no holdback, nor is there any reason to extend Shimco to that factual circumstance. The Court of Appeal addressed that the primary cause of the Subcontractor’s loss was the Owner’s failure to keep the holdback but held that the shortcoming is due to the wording of the Act, which the Legislature has the power to remedy.

Owners should be mindful of this decision and make note to pay out any holdback as soon as lawfully possible so as to guard against holdback liens. The decision by no means condones an owner’s failure to retain a holdback, but it addresses a far too common scenario where holdbacks are not kept or demanded and trade contractors try to enforce a lien against non-existent funds.