TruGrp Inc. v. Karmina Holdings Inc. Re-Evaluating Standard Language In Letters Of Credit For Lien Security

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In the construction industry, letters of credit serve a vital function as project security and as a means of securing lien claims, in both cases facilitating the flow of funds.
Canada Real Estate and Construction
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In the construction industry, letters of credit serve a vital function as project security and as a means of securing lien claims, in both cases facilitating the flow of funds. In the context of lien claims specifically, their longstanding use has led to standard language that is employed by parties vacating liens.

The language used in such instruments is arguably so standard and so commonly understood, that it might even be said to be immune from scrutiny – or, if not immune, highly resistant due to common understanding and use. Notwithstanding one’s expectation, however, they would be wrong. Specifically, and interestingly, the common language utilized in standard form lien security letters of credit has recently come under scrutiny in a Superior Court of Ontario case named TruGrp Inc. v. Karmina Holdings Inc.,1 (“TruGrp”).

In TruGrp, the plaintiff has raised the issue of whether the standard language used in a relatively basic letter of credit (issued by a well-known banking institution) was, in fact, consistent with the applicable legislative framework governing letters of credit employed for vacating liens. The Court provided a partial decision in TruGrp and below, we consider the implications of this decision and how it may impact the use of letters of credit in this context.


TruGrp Inc. (“TruGrp”) (a subcontractor specializing in building restoration and maintenance) moved to set aside an order obtained by Karmina Holdings Inc. (“Karmina”) that vacated TruGrp’s two claims for lien and certificate of action, which motion was initially decided on an ex parte basis. The order to vacate utilized a letter of credit from the Bank of Montreal (“BMO”) as security for TruGrp’s liens.

On the set-aside motion, TruGrp expressed concerns over the language in the approved security – i.e., a letter of credit – suggesting that the letter might not constitute sufficient security for its liens. This concern was allegedly supported by an email from the Accountant of the Superior Court of Justice (the “Accountant”), in which the Accountant expressed a similar opinion (as detailed below). In the alternative, TruGrp requested direction from the Court in respect of how to address the Accountant’s concerns.2

Karmina, the registered owner of the liened property in Hamilton, opposed the motion. It argued that TruGrp misunderstood the nature of irrevocable letters of credit, which have been commonly used as lien security for decades3 (a point these authors note is relatively uncontroversial).

The core dispute was therefore whether the form of the letter of credit was consistent with certain provisions of the Construction Act,4 and with the Accountant’s role as “custodian” as specified in O Reg 191/95 under the Public Guardian and Trustee Act.5

Specifically, the common form of the letter of credit allows the issuing bank to opt out of renewing the credit, provided that they must (1) notify the Accountant at least thirty days in advance and (2) substitute a bank draft for the amount of the credit minus any payments already made. TruGrp argued that this provision introduced a contingency in the security that conflicted with the Construction Act, and imposed inappropriate duties on the Accountant, contrary to the Public Guardian and Trustee Act. Karmina disagreed, and presented a series of procedural challenges to the motion.

The Superior Court’s Decision

The core of TruGrp’s motion centered on the terms related to expiry and renewal in the letter of credit, previously approved by the Court as adequate security for TruGrp’s lien claims in respect of Karmina’s motion to vacate.

The letter stipulated that it would expire on July 6, 2024, but included provisions for automatic annual renewal unless BMO provided a 30-day prior notice of non-renewal to the Accountant, accompanied by a bank draft for the net remaining amount of the lien, effectively ensuring continuity of security.

The letter of credit’s stipulations included three pertinent factors: (i) its expiry date, (ii) the condition of automatic renewal for successive one-year periods, and (iii) BMO’s prerogative to cease renewal by notifying the Accountant and submitting a substitute bank draft for the remaining balance.6 However, an email from the Accountant indicated that any replacement bank draft would require a court order pursuant to subrule 72.03(2) of the Rules (which provision governs how funds or securities held by the Accountant are managed and released).7

TruGrp argued that this requirement to seek a court order under 72.03(2) created a potential gap in security if BMO opted not to renew the letter of credit and the Accountant subsequently refused to accept the replacement bank draft without a court order, leading to a scenario where there could be no enforceable security for TruGrp’s lien.

This concern was heightened by Karmina’s ongoing efforts to sell the liened property, which could have resulted in TruGrp losing its secured position vis-à-vis the property, a scenario that would undermine the intent of the Construction Act to protect lien holders.8

Procedural context of motion

For decades, Ontario courts have accepted either lien bonds or letters of credit as “security” (as that term appears in section 44(1) of the Construction Act), despite that term not being defined in the Construction Act. Lien bonds (which were not the form of security in the present case) are specifically addressed in O Reg 303/18 under the Construction Act, prescribing Form 21 as the bond form, which, although outdated in referring to the “Accountant of the Ontario Court,” still effectively binds the principal and the surety in an obligation to the Accountant to cover any payment deficiencies on liens and associated costs.9

Conversely, while no specific form for letters of credit is prescribed under section 44, they are still viewed as acceptable security, especially when such letters of credit adhere to international commercial conventions as outlined in section 44(5.1) of the Act.10 The Court in TruGrp found that the language in the BMO letter of credit was consistent with the industry standard. In the motion at hand, the Court in fact acknowledged its previous endorsement of that form of letter of credit in Sundance Development Corporation v. Islington Chauncey Residence Corp.11

During Karmina’s initial ex parte motion to vacate, the Court expressed reservations about the letter of credit proposed by Karmina, with respect to (1) the vagueness of its requirements regarding the Accountant’s actions in drawing on the letter and (2) its failure to append the international commercial convention to which it referred. These issues were resolved with an amended letter from BMO, leading to its approval and the subsequent vacatur of the two TruGrp liens.12

Following receipt of the order to vacate, Karmina took the necessary steps to clear the lien claims from the property title, and TruGrp was duly informed through delivery of the Court’s issued and entered order, and the Accountant’s receipt of the posted letter of credit.

Despite this, TruGrp took steps to contest the sufficiency of the letter as security before and after the order (which resulted, for example, in the email from the Accountant). Their subsequent direct communications with the Accountant confirmed the need for a court order to modify or release the letter of credit, prompting the motion at issue in this case.13

As of the date of the motion, TruGrp’s liens were attached to the BMO letter of credit maintained by the Accountant, consistent with section 44(6) of the Construction Act.

Procedural challenges to motion

Karmina raised five procedural challenges against TruGrp’s motion: (1) the motion’s issues were res judicata and an abuse of process; (2) TruGrp failed to present any new evidence that could have altered the initial ruling; (3) TruGrp did not file the motion promptly, causing prejudice to Karmina; (4) the motion’s request to reinstate the lien claims could disrupt public policy by creating turmoil in the construction bar; and (5) the issue was moot, such that the Court should not hear the motion.14

Addressing the first challenge, the Court found that the motion’s issues were neither res judicata nor an abuse of process. The decision to vacate TruGrp’s lien claims was not based on a contested hearing but on an ex parte motion, making the case law cited by Karmina distinguishable. TruGrp directly challenged the vacating order under specific procedural rules, and did not make a collateral attack.15

With respect to the second challenge, while TruGrp’s evidence regarding the Accountant’s position on the letter of credit may have been ambiguous and hearsay, TruGrp’s arguments about the inconsistencies between the letter of credit’s language and statutory obligations were new and relevant, not presented during the original motion, such that this challenge was also dismissed by the Court.16

Regarding the third challenge, despite Karmina’s delay claim, the Court concluded the motion was filed in a reasonably timely manner, considering TruGrp had signaled its intention to challenge in a timely manner and had been actively communicating with the Accountant and Karmina about the issue.17

Interestingly, on the fourth challenge, i.e., public policy concerns, the Court found that the potential public policy concerns of overturning the vacating order were outweighed by the need to review whether the approved form of security (1) complied with the Construction Act and (2) did not improperly burden the Accountant.18

Regarding the fifth and final challenge concerning mootness, the Court did not find the motion moot. Rather, it found that the dispute over the letter of credit’s renewal conditions remained relevant and tangible, affecting ongoing security practices under the Construction Act.19

Accordingly, considering the totality of the circumstances – including the adversarial nature of the ongoing dispute over lien security, judicial economy, and the court’s role in ensuring legal compliance – the Court decided to hear the motion. This decision aligned with the Court’s responsibility to address significant legal issues when they arise, ensuring that relevant practices adhere to statutory frameworks and the underlying intent of the Construction Act. Thus, the Court dismissed Karmina’s procedural objections and allowed the motion to proceed on its merits, focusing on the sufficiency and legality of the form of the letter of credit.

Sufficiency of Letters of Credit

The core issue was whether BMO’s letter of credit provided sufficient security under section 44 of the Construction Act, and whether the Court’s approval of this security conflicted with the Accountant’s statutory role as set out in the Public Guardian and Trustee Act.

Both parties acknowledged the absence of case law specifically addressing the form of letter of credit commonly used as lien security, with only two cases being partially relevant, but neither addressing of them the standard renewal and expiry provisions directly.

TruGrp contended that the typical form of the letter of credit, used by BMO in the letter of credit at issue in this motion, was an uncertain security form contrary to the intent of the Construction Act, which aims for consistent and reliable security until a lien is finally resolved. TruGrp argued that the renewal terms introduced uncertainties harmful to lien claimants, potentially leaving them without continuous security. Further, TruGrp argued that the obligations imposed on the Accountant by the letter of credit conflicted with the statutory definition of the Accountant’s role as merely a “custodian,” which term assumed that the Accountant would not assume any active duties unless specified by a court order.20

Karmina, on the other hand, defended the Court’s approval of the letter of credit, emphasizing decades of precedent without any issue arising, and arguing for a broader interpretation of “custodian” that would include managing the securities actively, not just passively holding them.

Given the implications for the Accountant’s role and the novelty of the legal issues presented, the Court found it inappropriate to decide the motion at hand without the Accountant’s input. The Accountant was not initially notified of the motion, with its absence becoming notable given its central role in the dispute. Further, BMO was also to be given notice of the motion, due to its direct involvement as the issuer of the letter of credit.21

Karmina suggested dismissing the motion to allow for a re-filing with proper notices, but the Court concluded that approach would be inefficient given the existing proceedings and submissions. Instead, the Court elected to adjourn the motion indefinitely until the Accountant and BMO could provide their positions, and a further hearing could be scheduled if necessary.

The Court therefore ordered that both the Accountant and BMO be served with motion records and the motion reasons within fourteen days, with instructions for arranging a case conference if they chose to engage. This was to ensure a comprehensive review and fair opportunity for all affected parties to contribute to the resolution of this matter.

If neither the Accountant nor BMO take a position, the Court noted that it would proceed to decide based on the existing submissions.


TruGrp v. Karmina presents an interesting and somewhat atypical issue regarding the use of relatively standard form letters of credit as lien security. This dispute accentuates the critical nature of understanding the legal and procedural frameworks that govern financial securities in construction projects by highlighting the complexities involved when traditional financial instruments such as letters of credit intersect with specific statutory roles and requirements, such as those of the Accountant in lien matters under the Public Guardian and Trustee Act.

For industry stakeholders, this case is also a reminder of the importance of ensuring that financial securities are drafted to meet the specific requirements of governing legislation, as well as its underlying policy rationale(s). The potential for a letter of credit to fail in providing sufficient security due to its terms not aligning with statutory duties (even in circumstances where already accepted by the Court in one sense) could lead to significant financial exposure and operational risks.

The consequences of such a failure are potentially severe. Financially, if a letter of credit is deemed insufficient, the party relying on it for security (typically the subcontractor or supplier) faces the risk of non-payment and a lack of collateral on which to rely (e.g., the original liened property). This scenario can escalate into cash flow problems, delayed project timelines, and, in a worst-case scenario, insolvency if the funds tied to the project are significant relative to the claimant’s operational capacity.

TruGrp also underlines a predicament for intermediate parties, such as general contractors, who depend on the reliability of these financial instruments to fulfill their contractual duties to vacate liens. As readers will appreciate, general contractors often rely on letters of credit to vacate liens and satisfy their obligations to project owners. If these instruments are found to be unenforceable due to non-compliance with statutory requirements, general contractors may find themselves without reliable security – – particularly some contractors who cannot, for example, access a lien bond for one reason or another. This exposure could leave them vulnerable to subsequent claims from subcontractors for non-payment, and breach of contract claims from property owners due to unvacated liens.

Moreover, there is a broader industry impact to consider. Repeated instances where letters of credit fail to align with statutory requirements could lead to a loss of trust in these instruments as reliable forms of financial security in construction projects altogether. This may force industry participants to favour alternative forms of security and could prompt regulatory changes to better define the use of such financial tools.

We await with interest to see if the Accountant and/or BMO participate in the motion in question, and what its ultimate outcome will be with respect to the appropriate language for use in letters of credit as lien security.


1 2024 ONSC 2165 (CanLII) (“TruGrp v Karmina”).

2TruGrp v Karmina at para 1.

3TruGrp v Karmina at para 2.

4RSO 1990, c C.30.

5RSO 1990, c P.51.

6TruGrp v Karmina at para 11.

7TruGrp v Karmina at para 12.

8TruGrp v Karmina at para 13.

9TruGrp v Karmina at paras 15-16.

10 Typically, letters of credit in Ontario will refer to the ICC Uniform Customs and Practice for Documentary Credits (known as “UCP 600”). In that regard, Bruce Reynolds’ and Sharon Vogel’s seminal report on the Construction Lien Act, as it then was (Striking the Balance – available here) recommended that letters of credit that reference international commercial conventions should be accepted, provided that (among other things) the letter is unconditional and that the applicable convention is written into the terms of the letter of credit (see pg. 280).

11 2021 ONSC 241.

12 TruGrp v Karmina at para 20.

13 TruGrp v Karmina at para 23.

14 TruGrp v Karmina at para 25.

15 TruGrp v Karmina at paras 26-27.

16 TruGrp v Karmina at paras 28-29.

17 TruGrp v Karmina at para 30-32.

18 Ibid at para 33.

19 Ibid at paras 34-36.

20 Ibid at paras 45-48.

21 Ibid at paras 56-58.

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.

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