The British Columbia Court of Appeal decision in Kinetic Construction v. Tuscany Village Holdings Ltd. provides further guidance on the issue of whether the owner of a construction project can “set-off” claims it may have against a general contractor against sums being held “in trust” in a holdback account.
The Facts
The Plaintiff general contractor, Kinetic Construction Ltd., was retained to construct a mixed-use residential and commercial premises in Victoria, BC. The Defendants were the owners/developers (the “Owner”).
As required under the Builder’s Lien Act, the Owner established a holdback account into which monies held back from progress payments due were deposited.
A number of liens were filed by various subcontractors who were paid from the holdback. After all liens or lienable obligations to subcontractors on the Project were satisfied, a balance of approximately $480,000 remained in the holdback account. Kinetic sought payment out of the holdback account for amounts it said were owed to it under the contract. The Owner claimed that poor performance by Kinetic caused delay to the project and that, as a result, it suffered damages. The Owner intended to bring a counterclaim against Kinetic to recover these damages.
Kinetic made an application to the Court pursuant to section 5(3) of the Builder’s Lien Act for payment out of the holdback account. The Owner resisted this application, arguing that they should be entitled to “set off” their counterclaim against the funds in the holdback account.
The British Columbia Supreme Court’s Decision
Justice Metzger of the B.C. Supreme Court dismissed Kinetic’s application for payment of the holdback funds. In doing so, Justice Metzger found the Owner was entitled to set-off against the holdback funds provided there were no subcontractor claims. He says: “In the case before me, the subcontractors have been paid out. I am satisfied that when there are no subcontractors at risk of prejudice, a claim of set-off by an owner against a contractor is capable of preventing a trust from arising ab initio…I am satisfied that setoff, if proven, does prevent a trust from attaching to the Kinetic holdback.”
Justice Metzger also concluded that the ‘balance of conveniences’ favoured dismissal of Kinetic’s application since the most convenient and fair thing to do would be to leave the holdback funds in an interest-bearing account until there was a judgment in the trial of the matter.
The British Columbia Court of Appeal’s Decision
Kinetic appealed Justice Metzger’s decision to the B.C. Court of Appeal. While the Court of Appeal disagreed with some of Justice Metzger’s reasoning, it came to the same conclusion.
Specifically, the Court of Appeal held that Justice Metzger was incorrect in holding that the Owner’s claim of set-off prevented the holdback trust from arising. Rather, the Court of Appeal held that a trust had come into existence in respect of the funds in the holdback account prior to the Owner’s counterclaim arising.
However, the Court of Appeal also determined that this error did not affect the proper disposition of Kinetic’s application. After reviewing the law relating to the concept of set-off (the law suggests that set-off is appropriate where, among other things, the claims of the parties are clearly connected and interrelated), the Court of Appeal commented that the Owner’s set-off counterclaim arose out of the construction of the project and that the Owner’s claim and Kinetic’s claim were interrelated.
The Court of Appeal went on to state that while the holdback funds were impressed with a trust, the only remaining beneficiary was Kinetic since all liens and potential liens had been satisfied. Given this key fact, the Court went on to conclude that the fact that the holdback funds were held in trust did not prevent the Owner from advancing a claim of set-off against the funds in the holdback account. The Court of Appeal went on to conclude that before the holdback funds were released, there needed to be a judicial determination (e.g. a trial or summary trial) to determine the Owner’s and Kinetic’s respective entitlements to the holdback funds.
Conclusions
The Court of Appeal’s decision is significant in that it provides some clarity to the issue of whether an owner may ‘set off’ against holdback funds. This case suggests that:
(a) where all possible subcontractor liens and associated lienable obligations have been satisfied from the holdback account; and
(b) the owner has a claim against the general contractor that is closely related to the construction project in question; then
the owner is entitled to “set off” its claims against the holdback.
The holdback funds will remain as security until the “set off” is resolved by consent or by the courts. Those funds should remain in a jointly administered holdback account, or should be deposited with the court.
Co-written by former associate, David Plunkett.
