Guarantee Company of North America v Manitoba Date:, 2018 MBCA 32

Citation: Guarantee Company of North America v Manitoba Date: 20180403 Housing and Renewal Corporation et al, Docket: AI17-30-08855 2018 MBCA 32 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Barbara M. Hamilton Madam Justice Diana M. Cameron Mr. Justice William J. Burnett BETWEEN : THE MANITOBA HOUSING AND ) RENEWAL CORPORATION ) ) (Applicant) Respondent ) ) J. W. MacLellan ) for the Appellant ) THE GUARANTEE COMPANY OF NORTH ) AMERICA ) A. J. Ladyka ) for the Respondent (Respondent) Appellant ) The Manitoba Housing ) and Renewal Corporation - and - ) ) ATTORNEY GENERAL OF CANADA ) D. T.

Côté REPRESENTING THE MINISTER OF ) for the Respondent NATIONAL REVENUE ) Attorney General of ) Canada Representing The (Respondent) Respondent ) Minister of National ) Revenue - and - ) ) ABLE EAVESTROUGHING LTD., ) Appeal heard: DUNCALFE MECHANICAL LTD. and ) February 6, 2018 NICKEL ELECTRIC LTD.

SPRINGFIELD ) COLONY WOODWORKING LTD., UNITED ) RENTALS OF CANADA, INC. 5927324 ) Judgment delivered: MANITOBA LTD. carrying on business as ) April 3, 2018 PROGRESSIVE SANITATION, SUNOVA ) CREDIT UNION LIMITED, FALCON ) CREEK INDUSTRIES INC. ) ) (Respondents) ) On appeal from Manitoba Housing and Renewal Corporation v Able Eavestroughing Ltd , 2017 MBQB 27 BURNETT JA [ 1 ] The respondent The Guarantee Company of North America (the bonding company) appeals an interpleader order permitting the applicant The Manitoba Housing and Renewal Corporation (the owner) to pay into court the balance of funds (the funds) due under a construction agreement (the agreement) including statutory holdback.

The interpleader order provides that, upon payment of the funds into court, the owner’s liability in respect to the funds is extinguished, notices of lien claims and trust claims are vacated, and the respondent Attorney General of Canada representing The Minister of National Revenue (CRA) is entitled to the funds. Background [ 2 ] The factual background is fully set out in the application judge’s decision.

[ 3 ] Briefly stated, the owner entered into the agreement with Falcon Creek Industries Inc. (the general contractor) to renovate a residential housing complex (the project). As required by the owner’s tender request, the general contractor obtained a labour and material payment bond (the bond). The general contractor defaulted under the agreement by not paying its subcontractors. Pursuant to its rights under the agreement, the owner withheld payment from the general contractor. The bonding company paid some of the subcontractors pursuant to the bond and took assignments of those subcontractors’ rights.

The project is now completed. [ 4 ] Prior to disbursement of the funds by the owner, CRA served the owner with a requirement to pay pursuant to section 224(1.2) of the Income Tax Act , RSC, 1985, c 1 (5th Supp). It required the owner to pay to the Receiver General monies payable by the owner to the general contractor up to the amount of $862,376.87. [ 5 ] At the time of the interpleader application, the funds totalled $463,060.02 of which $146,729.41 was the 7.5% holdback required under The Builders’ Liens Act , CCSM c B91 (the BLA ).

The total amount paid by the bonding company to lien claimants under the bond was $610,183.88. The Bond and the Agreement [ 6 ] The signatories to the bond were the general contractor and the bonding company. In the bond, the general contractor was named the “Principal”, the bonding company was the “Surety” and the owner was the “Obligee”. The bond, which is in a common form used in the construction industry, provides that the bonding company’s obligation under the bond is subject to certain conditions, which include: 1.

A Claimant for the purpose of this Bond is defined as one having a direct contract with the Principal for labour, material, or both, used or reasonably required for use in the performance of the Contract. 2.

The Principal and the Surety, hereby jointly and severally agree with the Obligee, as Trustee, that every Claimant who has not been paid as provided for under the terms of its contract with the Principal . . . may as a beneficiary of the trust herein provided for, sue on this Bond . . . for such sum or sums as may be justly due to such Claimant under the terms of its contract with the Principal. [ 7 ] The agreement is also a form of contract well known in the construction industry.

Its general terms and conditions set out various rights and remedies the owner may exercise in the event of a default by the general contractor, including: 19.01 If an event of default has occurred, [the owner] may do any one or more of the following: (

a) withhold or retain the whole or part of any payment; . . . 19.03 If an event of default has occurred, [the owner] may withhold or retain the whole or part of any payment to the [general contractor]. 19.04 [The owner] may apply the amount withheld or retained to: (

a) pay any person to whom the [general contractor] is indebted in respect of Material, labour or services furnished for the Work; (

b) secure the discharge of a lien or trust claim served upon [the owner] pursuant to The Builders’ Liens Act ; . . . 19.05 Payment of such amounts shall discharge [the owner]’s liability to the [general contractor] to the same extent as payment directly to him.

19.06 Upon remedy of the event of default, any amount remaining from the amount withheld will be released to the [general contractor]. Position of the Bonding Company [ 8 ] The bonding company submits that the main issue is whether any amount was payable to the general contractor under the agreement.

The bonding company concedes that if the funds are payable to the general contractor, CRA would be entitled to payment of the funds. [ 9 ] The bonding company emphasised that its entitlement to the funds arose from its relationship with the owner and not through its subrogated position arising from payment by it to the subcontractors. [ 10 ] The bonding company did not suggest that it was entitled to the funds on the basis that all or part of the funds constitute lien or trust funds under the BLA .

In the Court below, it was agreed that a requirement to pay takes priority over claims advanced by lien claimants and trust claimants under the BLA . [ 11 ] The bonding company’s fundamental argument is that there are no monies owing by the owner to the general contractor because the bonding company, as surety, is entitled to the funds pursuant to the equitable principles of mitigation and subrogation and the law of guarantee.

It says that these principles apply to the relationship between the owner and the bonding company, as they do to the bonding company’s relationship with the subcontractors. [ 12 ] The bonding company submits that, by virtue of its obligation to the owner to pay the subcontractors under the bond, the owner should be viewed as a creditor under a guarantee and as a creditor for the purposes of

section 2 of The Mercantile Law Amendment Act , CCSM c M120.

Section 2 codifies the common law/equitable right of subrogation pursuant to which a creditor must protect a surety who “pays the debt or performs the duty” of another party by assigning the creditor’s security to the surety (see QK Investments Inc v Crocus Investment Fund et al , 2008 MBCA 21 at para 54 ). Therefore, the bonding company says that it is entitled to the funds (that is, the security held by the owner) and that the funds are not payable to the general contractor.

Decision of the Application Judge [ 13 ] The application judge agreed with the position taken by the owner and CRA that the owner had no obligation to pay the subcontractors and that the principles of mitigation and subrogation did not apply to the owner. Given that the project was completed, she concluded, as argued by CRA, that the funds were payable to the general contractor and that CRA is entitled to the funds pursuant to the requirement to pay. [ 14 ] In reaching her conclusions, the application judge saw no need to resort to American jurisprudence, as argued by the bonding company.

She relied on Canadian authority, including the Alberta Court of Appeal decision in Iona Contractors Ltd v Guarantee Company of North America , 2015 ABCA 240 .

Issues and Decision [ 15 ] The bonding company raises four issues on appeal: 1. whether any funds were payable to the general contractor when the general contractor was in default of its obligations under the agreement; 2. whether the owner, as a beneficiary under the bond, had an obligation to the bonding company to mitigate the bonding company’s losses under the bond; 3. whether the bonding company is subrogated to the owner’s rights because the owner is a beneficiary under the bond and the bonding company paid valid claims under the bond; and 4. whether the owner’s right to pay subcontractors (where the general contractor fails to do so) is an obligation of the owner such that no amount is payable to the general contractor. [ 16 ] For the purposes of this decision, I am prepared to assume that the agreement and the bond are standard form contracts and, as such, that the standard of review is correctness.

In my view, to the extent that there is a need to interpret the agreement and the bond, such

interpretation is of precedential value, and there is no meaningful factual matrix specific to the parties to assist the

interpretation process (see Ledcor Construction Ltd v Northbridge Indemnity Insurance Co , 2016 SCC 37 at paras 4 , 24, 46; see also Iona at paras 9-10, leave to appeal to SCC refused, 36649 (14 April 2016); and Corydon Village Mall Ltd v TEL Management Inc , 2017 MBCA 8 at paras 35-41 ). [ 17 ] With respect to the first issue, the application judge found that, in the absence of an obligation to mitigate or a right of subrogation, the funds were payable to the general contractor under the terms of the agreement given that the work was completed. In my view, the application judge did not err in so finding.

Whether the funds were payable should not be confused with the owner’s ability under the agreement to withhold or release payment in the event of default. While the owner was entitled to withhold or retain the whole or part of any payment due to the general contractor, it was not required to do so. There was no suggestion that the work was not

fully performed, and the owner’s contract administrator deposed that the funds were payable to the general contractor. Irrespective ofwhether there was an event of default or whether that default had been remedied, the funds were payable to the general contractor. [18] With respect to the second issue, under the bond, the bonding company guaranteed that it would pay claimants who hada direct contract with the general contractor for labour and material if the general contractor failed to do so.

The owner is not abeneficiary under the bond; it had no obligation to pay the claimants and no contractual relationship with them. [19] The owner is named in the bond as a trustee on behalf of the claimants. As stated in Harris Steel Ltd v Alta Surety Co,1993 CarswellNS 222 (SC (AD)), “A trustee is required because at the time the bond is entered into, the identities of the claimantscannot be ascertained and for the purpose of circumventing the rule preventing third party beneficiaries of a contract from suing forbreach of a contract” (at para 19).

In my view, this underscores the owner’s limited role. [20] Under the terms of the bond, it is the claimants, not the owner, who have an obligation to mitigate the exposure of thebonding company by preserving, assigning and delivering their security (generally their lien claims) to the bonding company. The owneris not, as the bonding company suggests, a creditor of the bonding company or the general contractor; the creditors are thesubcontractors, and the security is their lien claims. In my view, this is well established in Canadian jurisprudence.

See CitadelAssurance v Johns-Manville Canada, (SCC), [1983] 1 SCR 513; and Harris Steel at paras 19-21.

Section 2 of TheMercantile Law Amendment Act must be read in that context. [21] With respect to the third issue, I am not persuaded that there is any basis for the bonding company’s assertion that itwas subrogated to the owner’s rights.

The bonding company was called upon to perform the general contractor’s obligations to theclaimants and was subrogated to the full rights to which each claimant was entitled as against the general contractor. [22] With respect to the fourth issue, the application judge correctly found that the owner has no obligation under theagreement to pay the bonding company or subcontractors where the general contractor fails to do so.

As noted previously, theagreement provides only a discretion on the part of the owner to pay the subcontractors. [23] The application judge made no error in concluding that the funds were payable to the general contractor and herdecision to grant the interpleader order is entitled to deference. [24] I would dismiss the appeal with costs payable to the owner and CRA in accordance with Tariff C. JA I agree: JA I agree: JA