Canada: Construction Lien Act Trust Survives Challenge

On January 14, 2019, the Ontario Court of Appeal released its much anticipated decision addressing the interaction between the trust provisions of the Ontario Construction Lien Act1 (CLA) and the Bankruptcy and Insolvency Act2 (BIA) in The Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9.

In its well-reasoned, unanimous, and thorough decision, a five-member panel of the Ontario Court of Appeal tackled the landscape of arguments and issues raised by the long-standing question of whether a trust created by provincial lien legislation survives bankruptcy. While this question was directly addressed in the Alberta context nearly four years ago in the landmark Alberta Court of Appeal decision, Iona Contractors Ltd v. Guarantee Company of North America3, it was considered open by some in the Ontario context.

The issue at stake was whether suppliers and subcontractors (or the surety subrogated to their position having made payments under a Labour & Material Payment Bond) can rely on the trust created by the CLA to exclude trust funds paid (or to be paid) to a bankrupt contractor by the owner from the "property" of the bankruptcy estate available generally to all creditors. If the funds are not impressed with a trust, and therefore form part of the bankrupt contractor's estate, those suppliers and subcontractors down the construction pyramid of the project (the Trust Beneficiaries), whose work generated the funds, must stand in line with the bankrupt contractor's other unsecured creditors, significantly reducing or even eliminating any entitlement of those Trust Beneficiaries to payment of the funds. Over the years, confusion over this issue has been caused by Royal Bank of Canada v. Atlas Block Co4, as well as two Saskatchewan Court of Queen's Bench decisions5 .

The Ontario Court of Appeal, in allowing the appeal and overturning the decision of the motions judge, found that the BIA and CLA are not in operational conflict and that a valid common law trust was created on the facts of this case. This is consistent with the finding in Iona, adopted by the Ontario Court of Appeal in its decision. As a result, the Court of Appeal ordered that by operation of s. 67(1)(a) of the BIA, the subject funds are not property of the bankrupt contractor available for distribution to its creditors, but rather "trust funds" under the BIA available to the Trust Beneficiaries.

Background

The appeal arose from a priority dispute between employees and certain secured creditors of a bankrupt paving company, A-1 Asphalt Maintenance Ltd (A-1). The disputing secured creditors were the Royal Bank of Canada (the Bank) and The Guarantee Company of North America (the Surety), subrogated to the rights of the Trust Beneficiaries under the CLA. At the time of A-1's bankruptcy, it had four major ongoing paving projects, three with the City of Hamilton (the City) and one with the Town of Halton Hills (the Town). All four contracts had outstanding accounts receivable for work performed by A-1. The Receiver was directed in the Initial Order to establish a "Paving Projects Account" and deposit all receipts from the four paving projects (the Funds) into that account.

The Bank took the position that the Funds form part of A-1's estate available to all creditors, entitling it to the Funds as a secured creditor with priority over all unsecured creditors including the Trust Beneficiaries. The Surety and Trust Beneficiaries took the position that the Funds were s. 8(1) CLA trust funds that must be excluded from A-1's property on bankruptcy, pursuant to s. 67(1)(a) of the BIA, entitling the Surety to the Funds in its subrogated position to the Trust Beneficiaries.

The Receiver brought a motion for advice and directions to resolve the priority dispute and served a Notice of Constitutional Question identifying the purported potential conflict resolved in the Iona decision between the CLA and BIA.

Arguments and Reasons for the Decision

Citing the Supreme Court of Canada decision in British Columbia v. Henfrey Samson Belair Ltd6, and the Alberta Court of Appeal decision in Iona, the Court of Appeal took as its starting point that trusts established by provincial law must meet the general principles of the law of trusts in order to be excluded from the bankrupt's estate. It is common ground that those principles are the three certainties: certainty of intention, object, and subject matter. The Surety and the Trust Beneficiaries argued that the three certainties are present in s. 8(1) of the CLA, while the Bank disputed both certainty of intention and certainty of subject matter.

Turning first to the issue of certainty of intention, the Court of Appeal considered whether allowing the CLA to establish certainty of intention is contrary to Henfrey. In determining that it is not, the Court of Appeal interpreted Henfrey as requiring courts to look at the deeming language of a statute to determine whether there is certainty of intention. In other words, it is possible for a statute deeming a trust into existence to provide the required certainty of intention. This requirement is satisfied where a court finds an intention that the trustee be placed under an imperative obligation to hold property on trust for the benefit of another. The Court of Appeal clarified that not only can the "imperative obligation" be created by statute for the purposes of the BIA, but that s. 8 of the CLA does so. As a result, certainty of intention exists. In resolving this issue, the Court of Appeal also determined that there is no operational conflict between s. 8(1) of the CLA and the BIA, rejecting the Bank's argument that the purpose of s.8(1) is to alter priorities upon bankruptcy. As such, the doctrine of paramountcy did not apply.

Next, the Court of Appeal considered the issue of certainty of subject matter. In reversing the motion judge's finding, the Court of Appeal found that the language of s. 8(1) designated precisely what property the trust is meant to encompass, i.e. "all amounts, owing to a contractor or subcontractor, whether or not due or payable". The Court of Appeal reasoned that the amounts owed by owners on account of the paving projects were debts, owned by A-1, and it is well-established that a debt is a chose in action which can properly be the subject matter of a trust.

In determining that the funds paid for each paving project were readily ascertainable and identifiable, the Court of Appeal also rejected the argument relied upon by the Bank and the judge in Atlas Block that simply being paid into a single account resulted in commingling, depriving the trust property of the required element of certainty of subject matter. Since the Funds had not been converted to other uses, and they did not cease to be traceable to the specific project for which they had been paid, the Court of Appeal determined that it did not matter that neither the City nor Town had created segregated accounts or specifically earmarked the source of the funds they would use to pay the debts they owed for the paving projects.

Thus, having satisfied the requirements for a trust at law, the Court of Appeal concluded that the Funds satisfied the conditions of a common law trust and were therefore not the property of A-1 available for distribution to its creditors. In so deciding, the Court of Appeal eliminated the confusion caused by the decision in Atlas Block and the Saskatchewan Court of Queen's Bench decisions, cited above, which interpreted Henfrey to find that deemed statutory trusts for the construction industry did not operate in bankruptcy.

Takeaways

This decision, adopting and following the Alberta Court of Appeal Iona decision, provides further comfort to subcontractors and suppliers (as trust beneficiaries) that the trust rights contained in provincial lien legislation provide an effective security for their statutory right to payment, even in the context of a receivership or bankruptcy. By ensuring that the trust funds on a construction project remain in the construction pyramid until payment to the trust beneficiaries has been satisfied, these cases uphold the integral role the trust provisions play in protecting the rights and interests of those subcontractors and suppliers at the bottom of the construction pyramid, ordinarily the stakeholders most financially vulnerable to the bankruptcy of a contractor. Lastly, this decision is important for its confirmation that commingling of construction funds, typical practice for many construction companies, may not be fatal to the finding of the common law trust where funds are not converted to other uses and remain traceable.

The Guarantee was represented by Rick Shaban and James MacLellan at the hearing of the Iona decision.

Footnotes

1 RSO 1990, c C 30 [CLA].

2 RSC 1985, c B-3 [BIA].

3 2015 ABCA 240, leave to appeal dismissed, [2015] SCCA No 404 [Iona]. For more information, read our bulletin from April 2016.

4 2014 ONSC 3062 [Atlas Block].

5 See Duraco Window Industries (Sask) Ltd v Factory Window & Door Ltd (Trustee of) (1995), 34 CBR (3d) 196 (Sask QB); Roscoe Enterprises Ltd v Wasscon Construction Inc (1998), 161 DLR (4th) 725 (Sask QB).

6 [1989] 2 SCR 24 [Henfrey].

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions