Case Note: The Guarantee Company of North America v RBC

In The Guarantee Company of North America v Royal Bank of Canada, ["The Guarantee Company"], a rare five-judge panel of the Ontario Court of Appeal addressed a constitutional question with important implications for construction law. The Court held that there is no conflict between s 67(1)(a) of the federal Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("the BIA") and s 8(1) of the Ontario Construction Lien Act, RSO 1990, c C.30 ["the CLA"].[1]

Section 8(1) of the CLA states that, where money is owed to a contractor, the money is deemed to be held in trust for the benefit of the contractor. The same rules applies to money owed by contractors—the money is deemed to be held in trust for the benefit of the other party. The result is a "chain of trusts" with the property owner at one end and the workers at the other. The other "links" in the chain are the various contractors and subcontractors. The CLA deems the owner to be holding money in trust for the contractor, which is deemed to be holding money in trust for the subcontractor, which is deemed to be holding money in trust for the workers. Importantly, these trusts are "deemed" trusts, meaning that the trust relationship is expressly created by law once certain conditions are met. "Deemed" trusts are known as statutory trusts.

Section 67(1)(a) of the BIA states that property held in trust by a bankrupt person or corporation—known in law as "a bankrupt"—cannot be distributed to the bankrupt's creditors. The central question in The Guarantee Company is whether a statutory trust created by provincial law qualifies as a trust under federal law for the purposes of bankruptcy proceedings.

A-1 Asphalt Maintenance ["A-1"], a contractor, was declared bankrupt in December 2014. At the time, A-1 was owed by money by two clients, the City of Hamilton ["the City"] and the Town of Halton Hills ["the Town"]. The money related to ongoing paving work, for which A-1 had hired construction workers represented by the Laborers' International Union of North America, Locals 183 and 837, and the International Union of Operating Engineers, Local 793 [together, "the Unions"]. A-1 had not fully paid the workers at the time of its bankruptcy.

The CLA deemed the money owed by A-1 to the workers to be held in trust by A-1. When A-1 was declared bankrupt, the workers claimed that the money owed by the City and the Town to A-1 should be paid to them. The workers argued that the money owed by the City and the Town was held in trust for the benefit of A-1, and due to A-1's bankruptcy, the same money was deemed to be held in trust for A-1's beneficiaries—in this case, the Unions.

However, the money was also claimed by one of A-1's creditors, the Royal Bank of Canada ("RBC"). Recall that, under the BIA, money held in trust cannot be claimed by creditors. RBC therefore argued that the trusts created by the CLA should not qualify as trusts for the purposes of the BIA. RBC relied on the Supreme Court of Canada's decision in British Columbia v Henfrey Samson Belair Ltd, 1989 CanLII 43 (SCC) ("Henfrey") In that case, the Court held that a provincial trust can only qualify as a trust under federal law if it also meets the traditional common law criteria for establishing a trust.

The underlying issue is that, under the Constitution Act, 1867, Parliament has jurisdiction over "Bankruptcy and Insolvency" while the provincial legislatures have general jurisdiction over "Property and Civil Rights." As a result, a provincial law that seeks to regulate bankruptcy proceedings will likely be unconstitutional.

In Henfrey, the Court acknowledged that the BIA refers to "property held in trust" but does not give a definition of "trust." The Court therefore concluded that Parliament intended to maintain the common law definition, under which a trust depends on:

1. Certainty of intention – There must be certainty that the settlor (the person who created the trust) intended to create a trust.
2. Certainty of subject matter – There must be certainty as to which property has been placed in trust.
3. Certainty of object – There must be certainty as to the intended beneficiary (known as the "object" of the trust).

The central holding in Henfrey was that a provincial trust is valid under federal law only if the "three certainties" are present. In The Guarantee Company, RBC argued that the three certainties are not present in the trusts created by s 8(1) CLA. If the CLA trusts were not valid under the BIA, the money held in trust by A-1 (and by the City and the Town for the benefit of A-1) could be claimed by A-1's creditors, such as RBC.

The Ontario Superior Court of Justice found for RBC. The Court held that a trust created by the CLA can be valid under the BIA, but only if the three certainties are present. Here, the trust claimants had failed to establish the three certainties. The Guarantee Company of North America ("GCNA") and Ontario appealed the decision.

The Ontario Court of Appeal found for GCNA, Ontario, and the Unions, reversing the lower court decision. Relying on Henfrey, the Court held that a trust created by the CLA is valid at common law and therefore under the BIA. In particular, the Court held that the CLA provides the required certainty of intention. RBC had argued—and the lower court had accepted—that the three certainties must be established objectively; they cannot be "deemed" to exist by a provincial statute. The Court of Appeal rejected this argument, noting that "Henfrey itself contemplates that the statute deeming the trust into existence can provide the required certainty of intention."

Once the Court concluded that a trust created by the CLA is valid at common law, there was no need to address the constitutional question.

The construction industry can be volatile, and the trust-creating provisions of the CLA are intended to provide security. In particular, it provides security to construction workers, who are situated at the "end" of the "chain of trusts." Unlike workers in other industries, construction workers can be far removed from the ultimate source of their wages. Moreover, they rarely have a single "employer" in the traditional sense.

Section 8 of the CLA has been found constitutional and so will remain in force. In that sense, The Guarantee Company does not change the law. It should, however, provide welcome certainty to construction workers, who can rest assured that laws designed to protect them will be enforced.