In the high-pressure environment of commercial construction, liquidity is everything. Developers are concerned, as we know all too well, with moving a project forward in a timely manner, as financing always plays an important role. When a payment dispute leads to a claim of lien against a project, the standard industry response is swift: the general contractor posts security to vacate the lien from the title, ensuring that mortgage draws continue and the project remains solvent.
Commercial developers and contractors often operate under the assumption that “bonding off” a lien settles their immediate statutory obligations to the claimant. This assumption is dangerous.
As confirmed by the Supreme Court of Canada in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, 2015 SCC 43, and reinforced by the strict statutory regime of British Columbia’s Builders Lien Act (BLA), satisfying a lien does not satisfy the statutory trust requirements.
This distinction creates a “Trust Fund Trap”—a legal reality where a contractor can pay for a bond to secure a debt, and yet remain legally obligated to freeze the corresponding cash holdback. Failing to do so can result in “double security” requirements and, more alarmingly, in British Columbia, personal liability for corporate directors if the trust funds were misappropriated or converted (S. 11 of the BLA).
This article examines why the “one debt, one security” logic fails under the BLA and how to navigate the risks of the statutory trust.
The Two Pillars of Liability: Liens vs. Trusts
To understand the financial risk, one must distinguish between the two separate statutory remedies available to unpaid subcontractors in British Columbia. While they arise from the same debt, they are legally distinct.
1. The Lien (The Charge on Land)
A lien is a statutory charge against the owner’s interest in the improvement and the land. When a contractor utilizes Section 24 of the BC Builders Lien Act to cancel a lien, they are specifically addressing this property right. The security posted (cash or bond) stands in place of the land, ensuring that if the subcontractor proves their lien claim, funds are available.
2. The Statutory Trust (The Fiduciary Duty)
The second remedy operates independently of the land. Under Section 10(1) of the BC Builders Lien Act, money received by a contractor or subcontractor on account of the contract price constitutes a “trust fund” for the benefit of persons engaged by them.
Until all beneficiaries (subcontractors, workers, suppliers) are paid, the contractor is the trustee of those funds. Crucially, the trustee must not appropriate any part of that fund for their own use or any use not authorized by the trust.
The Case Study: Stuart Olson v. Structal Heavy Steel
The friction between these two remedies was definitively resolved by the Supreme Court of Canada in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel. Although the case originated in Manitoba, the Court’s interpretation applies directly to the mirror provisions found in British Columbia’s legislation.
The Scenario
Dominion (the General Contractor) hired Structal (the Subcontractor) for a major stadium project. Following a payment dispute, Structal filed a lien. Dominion followed standard commercial procedure: they filed a lien bond in the full amount of the claim to vacate the lien from the title.
The Conflict
Dominion argued that because they had posted a bond, they had secured the debt. Consequently, they believed they were free to use the progress payments received from the owner for other purposes. They argued that requiring them to hold the cash in trust and pay for a bond would force them to secure the same debt twice.
The Verdict: A Warning for Contractors
The Supreme Court of Canada rejected Dominion’s argument. The Court held that the trust and lien provisions are “two separate remedies”.
- The Bond is Limited: A lien bond merely secures the lien claim; it does not satisfy the trust obligation.
- The Trust Survives: The filing of a lien bond has “no effect on the existence and application of the trust remedy”.
The Court explicitly stated that a contractor cannot appropriate trust funds for their own use until beneficiaries are paid. A beneficiary “has not been paid simply by the filing of a lien or by funds or security being posted with the court for the purpose of vacating the lien”.
The Commercial Reality: “Double Jeopardy”
The implication of this ruling is what the Court termed “double security”. For BC developers and contractors, this may create a liquidity squeeze.
The Trap: If you are a General Contractor facing a $1 million claim, one possible scenario may be:
- Liability 1 (The Bond): You pay premiums and utilize your credit facility to post a $1 million lien bond to clear the title.
- Liability 2 (The Cash): You must simultaneously retain $1 million in cash from your progress payments in your bank account. You cannot use this cash to pay overhead, dividends, or expenses on other projects.
If you spend that $1 million in cash—reasoning that the bond covers the risk—you have misappropriated trust funds.
The BC Risk: Personal Liability for Directors
In British Columbia, the consequences of falling into this trap extend beyond the corporation. The Builders Lien Act pierces the corporate veil regarding breach of trust.
Under Section 11(3), if a contractor is a corporation, any director or officer who “knowingly assents to or acquiesces in” a breach of trust commits the offence in addition to the corporation.
This means a CFO or Director who authorizes the use of progress payments for general operating expenses—while a dispute is ongoing and “secured” only by a bond—could face personal liability and fines.
Escaping the Trap: The “Cash into Court” Solution
Is it possible to release the trust obligation without paying the subcontractor immediately?
The Supreme Court in Stuart Olson confirmed that a contractor can avoid double security, but standard bonds are not the answer.
To extinguish the trust obligation without paying the claimant directly, the contractor must pay cash into court.
- The Mechanism: Instead of posting a bond, the contractor pays the disputed amount into court under Section 23(or Section 24) of the BLA.
- The Result: The Court held that “payment of the trust funds into court to vacate a lien… does not constitute an appropriation or conversion of the trust funds”.
- The Benefit: Because the actual funds are secure in court, the contractor has fulfilled their duty. They do not need to hold additional cash in their own accounts.
While this solves the double security problem, it requires immediate capital liquidity, which is often exactly what the contractor is trying to preserve by using a bond.
Strategic Takeaways for BC Builders
Navigating the intersection of Stuart Olson and the BC Builders Lien Act requires financial discipline.
1. Segregate and Track Funds
Contractors must treat progress payments with the same care as a lawyer’s trust account. While Section 11(7) of the BLA notes that commingling funds with other money does not itself constitute a breach of trust, utilizing those funds for unauthorized purposes does. The safest practice is strict accounting segregation to prove that trust funds remain intact.
2. Assess the True Cost of Bonding
Before retaining a surety for a lien bond, calculate the true cost of liquidity. If posting a bond does not legally release you from holding the corresponding cash in trust, you are paying a premium for a product that does not fully solve your liquidity problem.
3. Recognize Cumulative Remedies
As noted in the 2025 Kingdom Langley BC Court of Appeal decision, the remedies in the BLA (liens and trusts) are cumulative, not alternative. Securing one does not automatically resolve the other. Your legal strategy must address both the charge on the land and the fiduciary duty over the funds.
The “Trust Fund Trap” can catch even the most experienced developers. It is a harsh reality that in British Columbia, securing a debt via bond is not legally equivalent to paying it.
If you rely on standard lien bonds to manage your disputes, you may be unintentionally exposing your company to frozen capital and your directors to personal liability. Cash flow management in the construction sector is no longer just a financial exercise; under the Builders Lien Act, it is a strict legal compliance obligation.
Contact Roland Luo in Vancouver for Dynamic Advice in Construction Litigation & Builders Liens
For the past two decades, we have specialized in construction litigation. Should you encounter such a claim or need to defend against a claim, contact Roland Luo.
Located in downtown Vancouver, Roland Luo proudly represents clients throughout British Columbia, as well as clients across Canada and the United States. To schedule a confidential discussion, contact us online (most efficient) or by phone at 604-800-4628.