On April 14, 2016, the priority of statutory trust protections afforded to subcontractors and suppliers under Alberta's lien legislation was strengthened: the Supreme Court of Canada dismissed an appeal in Iona Contractors Ltd. v. Guarantee Company of North America, 2015 ABCA 240, thereby bolstering the priority of the trust even in the face of a bankrupt general contractor.
The case concerned a dispute over entitlement to holdback funds between a surety, the Guarantee Company of North America (the "Guarantee"), and the trustee in bankruptcy of an insolvent general contractor, Iona Contractors Ltd. ("Iona"). Iona had been hired by the Airport Authority to build improvements on airport lands, and was required to provide a labor and material bond. Under the terms of the bond, issued by the Guarantee, if Iona failed to pay its subcontractors then the Guarantee would be responsible for paying them, and in return, the Guarantee would be subrogated to the subcontractors' claims.
Iona subsequently failed to pay subcontractors, the Airport Authority withheld payment from Iona, and the Guarantee paid out on the bond to settle the outstanding accounts of Iona's subcontractors. Subsequently, Iona applied for protection under the Companies' Creditors Arrangement Act, and was later assigned into bankruptcy.
The issue was who was entitled to the funds held back by the Airport Authority: the Guarantee, in its capacity as subrogee of the subcontractors, or Iona's trustee in bankruptcy. The Guarantee argued, among other things, that it took priority because the funds were impressed with a trust under section 22 of Alberta's Builders' Lien Act, RSA 2000 c B-7 ("BLA"). Iona's trustee argued that it took priority because those trust provisions offend the priority regime in the federal Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("BIA").
At issue, then, was whether the statutory trust scheme in the BLA could prevail in the event of bankruptcy proceedings. The Court of Appeal concluded that the BLA trust would only be given priority if it satisfied the criteria for a common law trust, being certainty of intent, certainty of objects and certainty of subject matter. A majority of the Court found that the BLA trust provisions did satisfy these common law criteria, and consequently, the trust provisions of the BLA took priority over the BIA.
The Supreme Court of Canada's dismissal means that the majority's conclusion is the final word on this point, at least for now. Subcontractors and suppliers can have increased faith in their right to statutory trust funds under the BLA. The impact of this case in other jurisdictions remains to be seen, but contractors and owners across the country can expect the Court's reasoning to feature in other cases with similar priority issues.
Iona demonstrates the distinct and powerful nature of the BLA trust provisions. Those provisions:
- operate irrespective of the lien remedies under the BLA;
- serve to deter members of the construction pyramid from misappropriating construction funds; and
- can provide subcontractors, material suppliers and other construction parties an effective means to recover payment for their work.
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.
