By
Pace Law

Two recent developments in construction litigation

May 7, 2020

There have been two recent developments that will be of interest to potential litigants in the construction sector. One of these developments arose from the current pandemic-induced shutdown, while the other relates to the prioritization of subcontractors in an insolvency matter.

LIMITATION PERIODS UNDER THE CONSTRUCTION LIENS ACT

On March 20, 2020, limitation periods and procedural time periods in Ontario were suspended retroactive to March 16. This at first included sections 31 and 36 of the Construction Act (“CA”), which specify time periods to preserve and perfect liens.

Although it was designed to assist claimants, the suspension did not address the timing for payment of holdback amounts, which under the statute are linked to the expiry of further subcontractor claims. It therefore had the unintended effect of suspending the release of statutory holdbacks to subcontractors, which in turn made it difficult for the construction industry, which was already struggling, to access cash.

As a remedy for this hardship, effective April 16, the limitation periods under the CA have now been exempted from the suspension. The one-month lapse from March 16 to April 16 will restart, giving those contemplating litigation under the CA an additional month to commence their claims, but potential litigants in this situation should be mindful that their limitation periods do remain in place at this time.

BANKRUPTCY AND PROVINCIAL STATUTORY TRUSTS

Before the Ontario Court of Appeal decided The Guarantee Company of North America v. Royal Bank of Canada (“Guarantee Company”) in 2019, trusts created under s. 8 of the CA did not survive bankruptcy. This meant that subcontractors owed money by a construction company that went bankrupt were forced to make claims along with all unsecured creditors against a bankrupt company’s residual funds.

Guarantee Company arose from the bankruptcy of an asphalt company. At the time, the company was owed approximately $700,000 from work it had already done, and the receiver brought a motion for directions on how to resolve a dispute between the Guarantee Company of North America (“Guarantee Company”) and the Royal Bank of Canada (“RBC”). The former had paid close to $2 million in bond claims to the asphalt company’s subcontractors, who were lien claimants under the CLA, while the latter was a secured creditor.

The court rejected RBC’s assertion that granting funds to the Guarantee Company constituted an attempt to reorder creditors’ priorities; held that the Guarantee Company’s trust was particular to debts owed to subcontractors; and held that commingling of trust property is not fatal to the survival of a trust if it is possible to trace the origin of the trust property.

In sum, the court has protected the scheme of holdbacks and liens under the CA, even in the event of a bankruptcy. This is a significant decision for the construction industry, particularly for subcontractors facing owners and general contractors that now seek bankruptcy protection.

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