Can a Construction Trust be Trusted?

By January 17, 2019news
The Guarantee is pleased to announce a landmark decision by the Ontario Court of Appeal affecting the entire construction industry.

On January 14, 2019, the Ontario Court of Appeal released a unanimous 5-panel decision in the case of The Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9 providing much needed clarity on the interaction between the trust provisions of the Construction Lien Act in Ontario and the Bankruptcy and Insolvency Act. This decision confirms that the statutory trust created by the Construction Lien Act in Ontario is not in conflict with the provisions of the Bankruptcy and Insolvency Act and remains effective through insolvency protecting those trust funds for the benefit of trust claimants and not for distribution to creditors.

Across Canada, the entire construction industry is focusing on implementing prompt payment and adjudication changes to ensure subcontractors and suppliers down the construction pyramid are paid, and paid promptly, for work performed. The intent of the new legislation is a major step forward, but by itself does not address how subcontractors and suppliers are paid when a contractor becomes insolvent. Historically, if a contractor goes bankrupt, subcontractors and suppliers have found themselves in a dispute with other creditors claiming entitlement to statutory trust funds. These disputes can be costly to argue and take a considerable amount of time to resolve.      

“This decision is a significant win for subcontractors and suppliers that have trust rights and for the surety industry.  It is the result of a tremendous amount of effort and energy, and my team and I are pleased to have led such an important initiative,” says Tara Wishart, VP of Claims, Toronto Branch. “This ruling reinforces our IONA decision in providing the legal clarity needed to protect construction trust funds from being collected as property under the BIA and ending up in the hands of secured creditors.”

For The Guarantee Company of North America, this is the second decision that supports the argument that trust funds set out under provincial lien legislation should flow to subcontractors and suppliers.  The previous decision was set out of the Alberta Court of Appeal, in Iona Contractors Ltd. v. The Guarantee Company of North America, 2015 ABCA 240 (leave to appeal to the Supreme Court of Canada denied).

Matthew B. Lerner and Scott M. J. Rollwagen of Lenczner Slaght Royce Smith Griffin LLP represented the Guarantee at the Appeal hearing.
Please note that it is unclear, at this time whether The Royal Bank of Canada intends to apply for leave to the Supreme Court of Canada.

To view the full ruling, please visit: