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Court ruling resets the playing field for bonding companies

Ian Harvey
Court ruling resets the playing field for bonding companies
PHOTO COURTESY OF SHUTTERSTOCK—There will be no Supreme Court of Canada appeal in the recent decision for The Guarantee Company of North America v. Royal Bank of Canada.

A landmark court decision supporting a construction bonding company’s claims in bankruptcy over a bank will stand without a Supreme Court of Canada appeal.

The unanimous five-member-panel decision in The Guarantee Company of North America v. Royal Bank of Canada, 2019 cleans up conflicts between the Ontario Construction Lien Act and the Federal Bankruptcy and Insolvency Act.

The issue turned over whether funds owing to or received by a bankrupt contractor in a statutory trust created by s. 8(1) of the Construction Lien Act R.S.O. 1990, c. C. 30 (“CLA”) are excluded from distribution to the contractor’s creditors, pursuant to s. 67(1)(a) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”).

The case involved paving contractor A-1 which filed for bankruptcy around 2014. At the time it had four major ongoing paving projects, three with the City of Hamilton and one with the Town of Halton Hills.

In the bankruptcy process, the court directed A-1’s receiver to deposit any accounts receivable from those jobs into a trust account. Subsequently the municipalities paid $675,372.27 which in turn went into those accounts.

The Royal Bank of Canada (RBC) claimed those funds because they were a secured creditor under the federal legislation. Guarantee Company of North America, also a secured creditor, countered saying it had bonded A-1 and paid out 20 Construction Lien Act claims totaling $1,851,852 to supplier and contractors.

Furthermore, the company countered that the Labourers International Union of North America (LIUNA) and the International Union of Operating Engineers (IUOE) also claimed for wages owed totaling $511,949.

The Royal Bank argued that because the moneys from four jobs were “co-mingled” into the trust account, it couldn’t be described as a trust account for this purpose.

The dispute drew the Attorney General of Ontario as an intervener in support of the Guarantee Company and the unions. The initial decision was that the funds in the trust fund were open for distribution to all creditors, including the Royal Bank and were to be shared pro rata.

The Guarantee Company appealed. The Ontario Court of Appeal panel rejected the issue of “co-mingling” because the money was traceable and secure. Further, it rejected the previous case of guidance, Royal Bank of Canada v. Atlas Block Co., 2014 ONSC 3062, which set that standard. It also rejected RBC’s argument that its standing as a creditor should take precedence over the others. The court also awarded costs of $75,000 against RBC for both hearings.

The decision was handed down in January of this year but it wasn’t until March that it became clear that RBC would not appeal to the Supreme Court of Canada, a long shot given that Canada’s highest court declines to hear 75 per cent of cases brought to it.

Indeed, the Supreme Court declined to hear a similar case from Alberta, Iona Contractors Ltd. v Guarantee Company of North America, 2015 ABCA 240.

In a similar matter, the Alberta Court of Appeal upheld an earlier decision that the provincial legislation validated the trust with the federal legislation notwithstanding. As a result any money paid to Iona should be paid to Guarantee which was the bonding company.

Tara Wishart, vice-president of claims at Guarantee’s Toronto office says the decision is an important one for the entire construction sector.

“Really it’s about ensuring the people who earned that money by doing the work, the tradespeople, get paid,” she says. “They were paid for the work performed only to be told that the money belonged to someone else (the bank).”

Bonding companies insure that the contractor and supplier hold up their end of the bargain and perform the work. The commissioning entity pays them for the work — or in the case of insolvency — pays the receiver.

“It ensures that the money will continue to flow for the benefit of the people who performed the work,” she says. “We’re happy about the decision but also in that the Ontario Attorney General joined and was aligned with our case and all the other organizations in the construction industry and assurance sector were also supportive and aligned.”

With this decision as well as the Alberta decision and the Supreme Court of Canada’s option not to review it, she says, the construction industry is in a much better position.

“There certainly was a sense of elation across the industry,” says Ian Cunningham, president of the Council of Ontario Construction Associations (COCA). “There was a pervasive sense of surprise that RBC didn’t appeal. Some thought they’re waiting for a different case with different facts and not up against a deep-pocketed opponent.”

Still, COCA was prepared to build a coalition of stakeholders to take the case to the Supreme Court if that body had given leave to appeal.

He said there was already a pool of $80,000 to $90,000 pledged to fund the battle, given the crucial importance of the ruling to the construction sector.

“We hadn’t even really asked for money at that point,” he says. “But we were engaging very serious construction lawyers to take this to the Supreme Court if required. The industry really coalesced behind this issue.”

Going forward, he says, there are no immediate plans for action other than to see how this ruling plays out in tandem with the new Ontario Construction Lien Act provisions and the prompt payment protocols.

“We’re a provincial association, so we don’t do a lot of lobbying at the federal level,” he says. “It might be something to look at trying to get the federal Bankruptcy Act changed though.”

However, given the October federal election, it’s probable that nothing will change in terms of legislation until well into next year if at all. “Meanwhile, there’s a strong and unanimous decision from the Ontario Court of Appeal which will stand and be the guiding principal at least until it’s struck down.”

Cunningham says the banks however are going to have to price in the risk involved in funding projects since they won’t automatically get priority disbursement of assets and payments.

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