Background

TruGrp registered two liens against lands owned by Karmina. Karmina obtained an order permitting the liens to be vacated from title via posting letters of credit issued by the Bank of Montreal. These orders were obtained on an ex parte basis – i.e. without notice being given to TruGrp.  

TruGrp sought to set aside the order. It took issue with the adequacy of the letter of credit. In particular, TruGrp took issue with the portion of the letter of credit which allows the issuing bank to decline renewal, as long as the Accountant of the Superior Court of Justice (who performs a role similar to the Clerk of the Court in Alberta) is given notice and provided with a bank draft for the amount of the letter of credit, minus any payments already made under it.

TruGrp argued that the language of the letter of credit might result in a lack of enforceable security for its lien, which would be contrary to the intent of the Construction Act. It argued that the provision allowing BMO to provide a bank draft instead of renewing the letter of credit creates potential gaps in security, leaving the lien claimant unprotected. It further asserted that the letter of credit imposed duties on the Accountant that are inconsistent with its statutory role as “custodian” under the Public Guardian and Trustee Act. According to TruGrp, the Accountant is limited to being a custodian of lien security and should not have to interpret or accept replacement bank drafts without a court order.

Karmina argued that the court’s longstanding practice of approving such letters of credit without issue indicates their adequacy. It argued that the role of “custodian” should include some degree of responsibility and management of the securities. Karmina further suggested that the term "custodian" should not be interpreted narrowly.

What the Court Said

The court focused on the two arguments TruGrp raised:

1. Compliance with the Construction Act: the court needed to ensure that the form of the letter of credit adhered to the statutory requirements of the Construction Act.

2. Consistency with the Accountant's role: the court examined whether the letter of credit imposed duties on the Accountant that were inconsistent with its statutory role as a custodian.

The court acknowledged the strengths of both parties' arguments and recognized that resolving the concerns required interpreting the Accountant’s role as “custodian” of lien security. However, the court felt it could not make this determination without input from the Accountant and BMO, both of whom would be impacted by the decision.

Consequently, the court decided to adjourn the motion, pending submissions from the Accountant and BMO. The court emphasized the necessity of a fair determination on whether the letter of credit met statutory requirements and whether it imposed inappropriate duties on the Accountant.

Applicability in Alberta

Procedurally, this result could not have arisen in Alberta. Applications to vacate liens via posting security in Alberta must be on notice to the lienholder. As such, the lienholder will always have the opportunity to review the proposed form of security (whether letter of credit, lien bond, or cash) to determine its appropriateness.

In terms of the adequacy of letters of credit as security to vacate liens, the Prompt Payment and Construction Lien Act allows “security” to be given or cash payment into court. Lien bonds are the most common form of “security”, yet letters of credit are also routinely used, particularly by commercial owners who have access to banking facilities but not surety bonding.

However, the arguments raised by TruGrp would likely apply in Alberta and elsewhere in Canada as well. Namely, a court must be satisfied with the adequacy of proposed security in order for it to stand in place of the lands to vacate a lien. The Courts of Appeal of Manitoba and Alberta considered the adequacy of lien bonds in place of cash in court in Bird Construction Group v Trotter and Morton Industrial Contracting Inc and Tempo Alberta Electrical Contractors Co. Ltd. v Man-Shield (Alta) Construction Inc., which demonstrates that courts will scrutinize the proposed form of security to vacate liens.

Takeaways

Although the court did not make a decision on the adequacy of letters of credit as security for liens in this case, the concerns raised by both parties provide important insights that can help mitigate the potential risks associated with using letters of credit as lien security:

• Due diligence on security instruments: ensure that any letters of credit or other security instruments comply with statutory requirements and are free from contingencies that could render them unenforceable.

• Understand the role of the custodian: be aware of the limitations and obligations of the Court in handling security. Their role is crucial in maintaining the validity and enforceability of these instruments.

• Monitor security renewals: keep track of renewal dates for letters of credit and other security instruments to ensure they remain valid and enforceable throughout the duration of your lien claim.

This case underscores the complexities of posting security to vacate construction liens. At Field Law, our experienced construction team can help navigate these challenges, ensuring your interests are protected in construction disputes. Contact Anthony Burden in Calgary or Ryan Krushelnitzky in Edmonton with any questions related to this case, liens, or security for liens.

Link to decision: TruGrp Inc. v. Karmina Holdings Inc., 2024 ONSC 2165