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Legal Notes: Letters of credit for lien security called into question

John Bleasby
Legal Notes: Letters of credit for lien security called into question

Karmina Holdings Inc. believed it had properly posted acceptable lien security when it received approval of a letter of credit (LOC) from the Bank of Montréal which it used to vacate two liens placed against it. After all, such letters have been a common and accepted form of security for decades.

However, restoration and maintenance contractor TruGrp Inc. which had filed the two liens wasn’t satisfied with the wording of the letter. It felt the language used could result in there being no security for its liens. TruGrp took its argument before Associate Justice Todd Robinson of the Superior Court of Justice, requesting the vacating order be set aside.

In response, Karmina took the position that TruGrp misunderstood how irrevocable LOCs work. Their use as lien security has been a common practice for decades.  Karmina characterized TruGrp’s motion as “being without merit and a waste of judicial resources.”

Associate Justice Robinson had previously approved the LOCs as security for TruGrp’s lien after initially expressing “concerns” over certain provisions that were later resolved. However, after hearing TruGrp’s arguments, he was not as certain.

His hesitation has sent a warning shot over the bow of construction law.

“The commonly used form of letter of credit contains a provision permitting the issuing bank to decline renewal of the letter of credit provided that the accountant is given at least 30 days’ notice and is provided with a bank draft for the amount of letter of credit, less any payments already made under it,” Associate Justice Robinson wrote. “TruGrp argues that the language of that provision gives rise to a contingency in the security that is at odds with the Construction Act. TruGrp further argues that it places duties and obligations on the accountant that are at odds with the Public Guardian and Trustee Act.”

Associate Justice Robinson pointed out there was nothing incorrect about Karmina’s use of a LOC.

“The form of letter of credit most commonly used and approved by the court as lien security is found among the precedents included in Conduct of Lien, Trust and Adjudication Proceedings.  As already noted, that precedent contains the same language challenged by TruGrp in BMO’s letter of credit.” 

However, TruGrp presented three key issues in its argument.

First, BMO’s LOC has an expiration of July 6, 2024. Secondly, the LOC automatically renews for successive one-year periods unless BMO elects not to extend the letter of credit.

Thirdly, BMO could exercise its option not to extend the letter of credit by providing at least 30 days’ written notice to the accountant and providing the accountant a bank draft for the balance of the security.

Associate Justice Robinson put the matter on pause, pending responses from both the “accountant and the Bank of Montréal.

“The accountant must be given notice of this motion and afforded an opportunity to provide a position before any decision on the merits is fairly made and rendered. I also find it appropriate to put BMO on notice of this motion, since the sufficiency of its letter of credit is at the centre of the parties’ dispute.” 

Sahil Shoor, partner with Gowling WLG, told the Daily Commercial News Ontario’s Construction Act allows for security to be posted in other specific formats, including a LOC. However, in his experience, he sees lien bonds used to vacate construction liens more often than LOCs.

Associate Justice Robinson recognized the importance to make a final determination regarding the roles of the accountant and the bank, lest there be “turmoil” among construction law practitioners.

“My view is that the core dispute should be decided now that it has been raised and argued.”

With the Bank of Montréal’s LOC expiring July 6, 2024, and the legal industry waiting anxiously, these concerns are echoed by Shoor.

“This case would have an impact on the construction industry and how the liens are vacated from the title to the properties.”

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to

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