Construction industry participants may be familiar with the process of vacating construction liens preserved under the Construction Act[1] by posting security with the Accountant of the Superior Court of Justice (the “Accountant”) in the form of a letter of credit (“LOC”). From an owner’s perspective, vacating a lien with an LOC frees project lands from the burden of a lien that might otherwise interfere with plans to finance or sell. From the perspective of lien claimants, an LOC posted to court for the entire value of the lien plus the lesser of $250,000 or 25 per cent of the value of the lien as security for costs, pursuant to s. 44(1) of the Construction Act, is ordinarily a sufficient substitute for a charge on the owner’s lands. For decades, Canadian banks have facilitated this exchange without issue, using a form of LOC that has become standard.
This status quo was called into question in TruGrp Inc. v. Karmina Holdings Inc.[2] The defendant, Karmina Holdings Inc. (“Karmina”), had obtained a typical, ex parte order vacating two claims for lien and a certificate of action of plaintiff, TruGrp Inc. (“TruGrp”), against premises owned by Karmina by posting an LOC issued by the Bank of Montreal (“BMO”). TruGrp brought a motion to set aside the vacating order on the basis that the language of the BMO LOC created a risk that TruGrp’s liens would be left unsecured.
The Construction Act does not prescribe a form of LOC as lien security; however, the impugned BMO LOC accorded with the typical form of LOC commonly approved by the court, and which can be found as a precedent in the text Conduct of Lien, Trust and Adjudication Proceedings.[3] That form contains a provision permitting BMO to decline to renew the LOC if it gives the Accountant at least thirty days’ notice and supplies the Accountant with a bank draft for the balance of the security.
Through TruGrp’s correspondence with the Accountant’s office, TruGrp learned that, in the event BMO declined to renew its LOC, the Accountant would not accept a bank draft without a court order pursuant to subrule 72.03(2) of the Rules of Civil Procedure (which governs the release of money or security held by the Accountant).[4] TruGrp raised two issues with the form of LOC. The first was that it created a potential gap in the enforceability of its security if BMO were to refuse to renew its LOC and the Accountant refused to accept the bank draft without a court order. TruGrp submitted that this uncertainty was contrary to the scheme of s. 44 of the Construction Act which intends that lien security put lien claimants in the same secured position vis-à-vis lien security as it would have been prior to the lien being vacated. Second, TruGrp argued that the LOC wrongly imposed positive obligations upon the Accountant that were at odds with the Accountant’s statutory role as a mere custodian of securities. TruGrp argued, for instance, that if BMO opts to not renew the BMO LOC, the Accountant will be required to decide of BMO’s notice of non-renewal is compliant with the LOC, review the bank draft to confirm that it is also compliant, and then decide whether to accept or reject the bank draft, which may require the Accountant to engage directly with BMO, Karmina, and/or TruGrp – all of which are outside of the scope of the Accountant’s statutory role.
The issues that fell to be determined by the court were twofold[5]: (1) was the LOC sufficient security under s. 44 of the Construction Act; and (2) was the LOC at odds with the role of the Accountant as “custodian” as set out in s. 3(7) O Reg 191/95 under the Public Guardian and Trustee Act?[6]
Karmina argued that the BMO LOC was not contrary to the Construction Act or the Public Guardian and Trustee Act. Karmina pointed out that courts have been approving the same form of LOC for decades without encountering the issue raised by TruGrp. Further, Karmina submitted that the Accountant’s role as a “custodian” was more than the “inanimate piggy bank” that TruGrp made it out to be. In any event, there was no potential gap in the lien security because there was no basis for the Accountant to refuse to accept a bank draft (assuming it has been given the required thirty days notice), which was a substitute for a letter of credit already approved by the court.
In Associate Justice Robinson’s opinion, these important and novel issues could not be properly resolved without the participation of the Accountant and BMO. The court was being asked to interpret the meaning of “custodian” in s. 3(7) O Reg 191/95, which it could not do without affording the Accountant an opportunity to consider and make submissions on the scope of its role with respect to lien security. Further, it was necessary to allow BMO to make submissions on the sufficiency of its LOC which was at the center of the dispute.[7]
Accordingly, TruGrp’s motion was adjourned with directions to serve the Accountant and BMO with motion materials, affording them an opportunity to take a position on the motion.[8]
We await to see whether the Accountant and/or BMO will take a position on this motion and how the court will ultimately come down on the sufficiency of the form of LOC most commonly relied upon by stakeholders in the construction industry – both by owners and contractors as an accessible form of substitute security by which to keep title to real property free and clear of liens, and by contractors and subcontractors as reliable security for payment of their lienable supply.
Miller Thomson would like to acknowledge Michael Gora, 2024 Articling Student, for their contribution to this article.
[1] Construction Act, RSO 1990, c C.30.
[2] TruGrp Inc. v. Karmina Holdings Inc., 2024 ONSC 2165.
[3] Bowles, Brendan. Conduct of Lien, Trust and Adjudication Proceedings. Toronto: Thomson Reuters; 2023 ed.
[4] Rules of Civil Procedure, RRO 1990, Reg 194, r. 72.03(2)
[5] Karmina raised five procedural challenges to TruGrp’s motion, all of which were dismissed. TruGrp, supra note 2 at paras 6, 14-24.
[6] Public Guardian and Trustee Act, RSO 1990, c P.51; General, O Reg 191/95 s. 3(7).
