Canada: Builders' Lien Act Trust Survives Challenge

Iona Contractors Ltd. v. Guarantee Company of North America

The Alberta Court of Appeal released its much anticipated decision addressing the interaction between the trust provisions of the Builders' Lien Act ("BLA") and the Bankruptcy and Insolvency Act ("BIA") in Iona Contractors Ltd. v Guarantee Company of North America, 2015 ABCA 240 on July 16, 2015.

Since the release of the Queen's Bench decision on June 10, 2014, there have been numerous articles and presentations discussing the decision of the Chambers Judge which did not fully capture the arguments or the issues regarding whether a trust created by provincial lien legislation survives in a bankruptcy.

The majority decision of the Alberta Court of Appeal, in allowing the appeal and overturning the decision of the Chambers Judge, in a well-thought-out and thorough examination of the issues and the law has clarified the interplay and priorities between the BLA trust provisions and the BIA.

The application arose due to a dispute between a surety, The Guarantee Company of North America ("The Guarantee"), subrogated to the rights of BLA trust claimants, and the Trustee in Bankruptcy of Iona Contractors Ltd. ("Iona"). The dispute centred on Iona's entitlement to contract funds unpaid by the Calgary Airport Authority ("Airport Authority"). In 2009, Iona and the Airport Authority entered into a contract for the construction of an improvement on the Airport Authority's north airfield (the "Project"). Under the contract, the Airport Authority required Iona to deliver a Performance Bond and a Labour and Material Payment Bond (the "Payment Bond") to guarantee that suppliers of labour and material to the Project would be paid. The Guarantee issued the surety bonds.

In the fall of 2010, after the Project was substantially complete but before the holdback was released to Iona, a number of Iona's subcontractors (the "Trust Claimants") provided notice to the Airport Authority that their accounts remained unpaid, which caused the Airport Authority to withhold further payment to Iona of $997,715.83 (the "Trust Funds"). The Guarantee paid out approximately $1.4 million under the Payment Bond to settle the claims of the unpaid Iona subcontractors.

In December 2010, Iona sought protection from its creditors under the Companies' Creditors AgreementAct ("CCAA"), and on March 18, 2011, Iona was assigned into bankruptcy. The Guarantee, having paid the Trust Claimants under the Payment Bond, became subrogated to the rights of the Trust Claimants to the Trust Funds.

The application was brought by the Trustee of Iona to resolve the competing claims to the Trust Funds:

  1. On the one hand, the Trustee claimed entitlement to the Trust Funds as property of the bankrupt estate; and
  2. On the other hand, The Guarantee claimed entitlement to the Trust Funds through the subrogated position of the Trust Claimants.

The majority of the Court of Appeal first addressed the preliminary issue of whether the BLA applied to the Project given that the Calgary Airport was a federal undertaking. The appeal was argued by agreement of the parties on the basis that the trust provisions of the BLA did apply.

The second issue addressed by the Court of Appeal was whether the trust created by s.22 of the BLA (provincial legislation) conflicted with the priority regime of the BIA (federal legislation) and, if not, whether a proper common law trust was created on the facts of the case. Section 22 of the BLA provides that contract money paid to a contractor (in this case Iona) is held in trust for the benefit of its subcontractors (in this case the Trust Claimants) where:

  1. a certificate of substantial performance is issued;
  2. the payment is made by the owner after substantial performance is issued; and
  3. the contractor owes money to a subcontractor.

First, the majority of the Court of Appeal considered the interaction between provincial lien legislation and federal bankruptcy legislation. Where a conflict exists between a provincial statute (in this case the BLA) and federal statute (in this case the BIA), the principle of paramountcy dictates that the provisions of the BIA, being the federal statute, prevail. On this point, the majority of the Court of Appeal concluded that "Merely noting that a provincial law has some effect onpriorities is not determinative". In other words, the fact that the trust provisions in the BLA could indirectly affect the priorities of creditors contemplated in the BIA is not enough to establish a conflict such that the BLA is ineffective. The majority of the Court of Appeal found that there is no operational conflict between s.22 of the BLA and the BIA.

Second, the majority of the Court of Appeal determined that, based on the facts of the case, a valid common law trust was created. The majority of the Court of Appeal considered the three common law requirements for the creation of a valid trust: (i) certainty of intention; (ii) certainty of object; and (iii) certainty of subject matter, which are informed by s.22 of the BLA.

The majority of the Court of Appeal also commented on the decisions of AtlasBlock (Ontario Superior Court – 2014), Duraco Window (Saskatchewan Queens Bench –1995) and Roscoe Enterprises (Saskatchewan Queens Bench – 1998) each of which essentially held that no statutory provincial trust will be effective after a bankruptcy. The Court of Appeal rejected the conclusions in these decisions and noted that the decisions were inconsistent with prior decisions.

Accordingly, the majority of the Court of Appeal allowed the appeal and held that the unpaid contract funds were trust funds under the BLA and therefore not property of the bankrupt, Iona. As a result, the majority of the Court of Appeal ordered that the Trust Funds be paid to the Guarantee in its subrogated capacity to the position of the Trust Claimants.

The implications to the surety and construction industry of this decision are significant. The trust provisions created in the provincial lien legislation are a powerful deterrent to the misappropriation of construction contract funds and provide subcontractors and suppliers with an effective remedy to recover payment for their labour and materials supplied to a construction project. The Alberta Court of Appeal's decision provides clarification and certainty to the enforceability of statutory trust rights and the interplay between provincial lien legislation and the BIA.

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

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