Canada: Posting Letters of Credit to Bond Off Construction Liens In Ontario

Financial institutions who lend to clients involved in the construction industry may be familiar with the process of "bonding off" liens under the Construction Lien Act, (Ontario).  If a construction lien is registered on title to the lands upon which construction is taking place, no advances can be made under a construction mortgage while the lien remains on title to the lands. However, by posting a bond as security for the construction lien claim, a party can arrange to have the lien vacated from title to the land, and the bond will instead stand at the ready to pay the claim if it is upheld and the party that posted the bond is liable to the lien claimant. However, as discussed below, there are specific requirements for a Letter of Credit used to bond off a construction lien that may not be readily apparent.

The bonding off process is designed to allow a general contractor or owner to continue to pay for work without first having to pay off the lien. Banks and other lenders likewise can continue to make advances under construction loans without losing priority to lien claimants once the lien is vacated from title to the lands. 

The Ontario Construction Lien Act does not specify the kind of security needed to bond off a construction lien. However, construction litigators who appear regularly in construction lien court in Toronto know well that the court reserves the right to "approve" any security posted to vacate a construction lien.1 And for many years, Toronto Construction Lien Masters have insisted that any letter of credit posted as security must not contain any reference to international commercial conventions concerning letters of credit. Letters of credit are expressly refused approval where international commercial conventions are referred to in their terms.

Duncan Glaholt in his text Conduct of a Lien Action, 2013 writes as follows:

The letter of credit must not be conditional on compliance with the uniform Commercial Code for International Letters of Credit, or any like conditional language.2

This practice is alive and well in the courts.  In Naylor Group Inc. v. Enfinity Canada EPC Inc.3, Enfinity intended to post a Letter of Credit that was "subject to ISP98". Enfinity's European parent had arranged for a Letter of Credit from a European bank the beneficiary of which was the Royal Bank of Canada as security for a letter of credit issued by Royal Bank to bond off the construction lien. The motion to vacate the lien and post security was dismissed because, in the words of Master Polika, "by inserting the term, on its face the letter of credit is subject to ICC Publication 590 [sic] and there is potential that the term will be invoked to deny payment."

Clearly, this practice is at odds with how letters of credit actually work.4 A closer look at the true nature of letters of credit, however, shows that all letters of credit are not in fact "conditional" on any factors that could be relied on to avoid payment. In Bank of Nova Scotia v. Angelica-Whitewear Ltd.,5 Justice LeDain, writing for a unanimous Supreme Court of Canada outlined the key principle behind letters of credit:

The fundamental principle governing documentary letters of credit and the characteristic which gives them their international commercial utility and efficacy is that the obligation of the issuing bank to honour a draft on a credit when it is accompanied by documents which appear on their face to be in accordance with the terms and conditions of the credit is independent of the performance of the underlying contract for which the credit was issued.6

What all this means is that regardless of disputes between the buyer and seller over the goods or their delivery, the seller will receive payment upon presenting the bank with the letter of credit and other required documents. If a letter of credit is immediately enforceable upon presentation to the issuer of the required documents, it is difficult to see how that letter of credit could ever be termed "conditional". With no contingency (other than presenting the documents) there is no uncertainty in the payment process.

The Court in Angelica-Whitewear noted that there is only one instance in which a bank may refuse to honour a letter of credit, namely fraud by the beneficiary of the letter of credit. However, the standby letters of credit posted with the Superior Court of Justice to bond off construction liens are payable only on court order. (This is the cumulative effect of Rule 72.03 of the Rules of Civil Procedure and the Construction Lien Act.) Since the beneficiary of a standby letter of credit posted to bond off a construction lien is always the Accountant of the Superior Court of Justice, and since the Accountant must always act under court order, fraud by the beneficiary (i.e. the Accountant) simply cannot occur.

However, until a higher court rules on the matter, a Construction Lien Master simply will not allow a Letter of Credit that is subject to an international convention to be posted with the Accountant of the Superior Court to bond off a construction lien.


1 This practice appears to originate from the requirements of s. 29(4) of the old Ontario Mechanics Lien Act, R.S.O. 1970, c. 267, although it is not strictly a requirement of the Ontario Construction Lien Act.

2 Glaholt, p. 142

3 [2012] O.J. No. 3573 (Master),

4 Ironically, Duncan Glaholt has now updated his text to include the following commentary, citing Naylor:

"This point must be stressed. The masters' office still receives forms of letters of credit that are expressed in conditional language, or incorporating international standards that themselves, arguably, incorporate conditional language and these will be rejected. As one of the masters has put it, "You will not get around us on this one". By insisting on unconditional language, the masters simply ensure that there is no chance of the Accountant of the Superior Court being embroiled in litigation because of conditional language." [italics in original]

5 [1987] 1 S.C.R. 87

6 Angelica-Whitewear, at para. 10

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

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

Events from this Firm
8 Nov 2016, Seminar, Ottawa, Canada

The prospect of an internal investigation raises many thorny issues. This presentation will canvass some of the potential triggering events, and discuss how to structure an investigation, retain forensic assistance and manage the inevitable ethical issues that will arise.

22 Nov 2016, Seminar, Ottawa, Canada

From the boardroom to the shop floor, effective organizations recognize the value of having a diverse workplace. This presentation will explore effective strategies to promote diversity, defeat bias and encourage a broader community outlook.

7 Dec 2016, Seminar, Ottawa, Canada

Staying local but going global presents its challenges. Gowling WLG lawyers offer an international roundtable on doing business in the U.K., France, Germany, China and Russia. This three-hour session will videoconference in lawyers from around the world to discuss business and intellectual property hurdles.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.