Legal Blog

Swiftest

The race goes to the swiftest or, if not the swiftest, at least to the person out of the gates the fastest. Section 7(3) of the Construction Lien Act creates a trust for, among other things, money in the hands of an owner after substantial performance has been certified by a payment certifier, declared by a court, or agreed upon by the owner and general (see section 32 of the Act regarding agreement on substantial performance). When a project will be sold, but has not yet been sold, who has priority over the ultimate sale money and the project’s current income: the receiver of an insolvent owner or the contractors who totally completed the project? This answer depends on the facts and is discussed in Royal Bank v. Penex Metropolis Ltd., a 2010 decision of the Ontario Superior Court of Justice.

Time

The contractor completed the project, but, before it was paid, the owner became insolvent and a receiver was appointed to take control of and ultimately sell the project. At the time of the receiver’s appointment, the contractor had not obtained a certificate of substantial performance; when asked to do so, the receiver refused to grant it. There was no payment certifier under the contract. Without more, the contractor was in trouble: no certificate, no section 7(3) trust.

Accordingly, the contractor moved to obtain a declaration for a certificate of substantial performance backdated to the date it requested that certificate. The receiver argued that the contractor could not obtain a certificate of substantial performance because, by then, the project was totally completed and, the receiver argued, the contractor was too late to apply.

Result

The judge simply disagreed with the receiver’s position and granted the certificate as of the date the contractor first requested it from the receiver. As soon as the judge made that order, section 7(3) became operative and the trust arose. Accordingly, since the receiver had not sold the project and distributed the proceeds before the trust arose, the contractor established its priority to the funds that the receiver would ultimately obtain after the project’s sale.