UPDATED: Reduce Security Posted Into Court to Vacate a Lien by Making Section 28 Payments

The Divisional Court recently released its decision in Demikon Construction Ltd v Oakleigh Holdings Inc (“Demikon”) determining that section 28 payments made by owners and contractors who want to “jump a rung” and directly pay subcontractors or sub-subcontractors are only valid to the extent that those payments are made to a person having a lien. Pursuant to section 1.1 of the Construction Act, a person having a lien includes both a lien claimant and a person with an unpreserved lien. Where owners or contractors try to make section 28 payments to parties not meeting the definition of a person having a lien, such payments may not result in a credit to the payor and may not be relied upon to reduce security paid into court to vacate any liens arising from the improvement.

In reaching this conclusion, the Divisional Court held that:

• The proper interpretation of section 28 of the Construction Act limits the application of that section to direct payments to a person having a lien relating to an amount owed to that person for services or materials supplied to the underlying improvement.
• The motion judge erred in interpreting the words “any amount owing to that person for services or materials supplied to the improvement” in isolation from the earlier portion of section 28, which modifies the above-quoted clause to limit section 28 to payments made to persons having a lien.
• Interpreting section 28 so as to only apply to persons having a lien furthers the purpose of the Construction Act. It provides owners and contractors with a tool to resolve claims for lien and remove encumbrances from the title to an improvement. The rationale for allowing owners/contractors to make direct section 28 payments without privity of contract expires once liens expire or are otherwise resolved.

Following Demikon, Anyone considering making a section 28 payment needs to ensure, at minimum, that the recipient of the payment is a person having a lien and that the payor provides the required prior written notice. Potential payors should also try to get an acknowledgement from the proper payee (i.e. the contractor or subcontractor being jumped over by the section 28 payment) that the amounts the payor intends to pay are owed, as well as an explanation as to any reasons for non-payment that may exist.

As always, it is important to consider your project's specific contractual terms and circumstances before taking any steps. Section 28 payments can be a valuable tool but are not a one-size-fits-all approach. The lawyers at Construct Legal can help review your situation and determine the right approach for your needs.

This article is not legal advice and is provided for information only.