Court of Appeal confirms additional protections for contractors in construction projects: Urbancorp Cumberland 2 GP Inc.

This is a significant decision for contractors and for project owners, particularly in the COVID-19 world, in which the financial viability of construction projects is more and more uncertain.

The Ontario Court of Appeal recently considered protections for contractors in construction projects where the owner becomes insolvent in Urbancorp Cumberland 2 GP Inc. (Re). Specifically, the Court of Appeal considered whether section 9 of the Construction Act applies when the owner becomes insolvent.

The Cumberland Group was a residential condominium developer that consisted of a number of related entities. These entities owned unsold condominium units in a project that they had constructed. The appellants were contractors who had supplied work and material to these units and they were owed significant amounts by the Cumberland Group.

The Cumberland Group became insolvent under the Bankruptcy and Insolvency Act and were later afforded protection under the Companies' Creditors Arrangements Act ("CCAA"). A monitor was appointed over the Cumberland Group entities under a CCAA order. The monitor sold the condominiums in the project on behalf of the Cumberland Group, and used the proceeds as follows:

1. To fund the insolvency proceeding and repay financing; and
2. Excess proceeds of the sale were placed into bank accounts opened by the monitor in the Cumberland group entities' names.

Section 9 of the Construction Act provides that where an owner's interest in a premises is sold by the owner, a trust arises over that amount after payment of reasonable expenses by the vendor arising from the sale or to discharge any mortgages on those premises.

The Court of Appeal concluded that the excess sale proceeds in the Cumberland Group's bank accounts were subject to the section 9 trust and found that there was no conflict between this provision and any federal legislation. Section 9 was valid provincial legislation as it "protected the rights and interests of those engaged in the construction industry and to avoid the unjust enrichment of those higher up the construction pyramid".

In the circumstances of this case, the Court of Appeal found that the monitor sold the "owner's interest" in the premises and that the requirements of the trust had been met. Therefore, the funds in the sum of nearly $3.9 million were impressed with a trust in favour of the contractors on a pro rata basis.

This decision is significant because it provides additional protection to contractors working on major construction projects. There are strong policy reasons to protect contractors in such a manner, as otherwise this would impose an unfair burden on contractors to either assess the financial viability of a construction project before commencing their work or take on undue risk in proceeding with construction of a project that could become financially insolvent, thereby leaving them without proper security or recourse.

However, the Court of Appeal cautioned that, depending on the nature of the sale and other factors, the trust may not attach and protect the contractor. Ascertaining whether the trust attaches can be a complex matter, and contractors and owners alike should consider retaining legal counsel for an opinion on this topic.