The Ontario Superior Court's recent decision in Northwest Angle 33 First Nation v Razar Constructing Services Ltd., 2023 ONSC 1233 ("Northwest Angle") is yet another reminder to parties entering into construction contracts of the importance of unambiguous contractual language. The decision in Northwest Angle highlights that courts will look to the contractual language used to determine the right to priority to holdback amounts when there is a dispute.

Background

In early 2020, Northwest Angle 33 First Nation ("First Nation") contracted Razar Constructing Services Ltd. ("Razar Construction") for construction of an inlet water system to provide safe and clean drinking water to residents of the First Nation (the "Project Contract"). The Project Contract set out the requirement that the First Nation retain a 10 per cent "statutory holdback" and a 2 per cent "maintenance holdback" from progress payments owing to Razar Construction.

Approximately three months into the Project Contract, the First Nation exercised a remedy under the contract removing Razor Construction from the project, citing uncorrected defaults. The Project Contract stated that if any part of the work as set out under the Project Contract is taken out of Razar Construction's works, any right of payment is extinguished. At the time of the remedy, the statutory and maintenance holdbacks collectively totalled $1,204,516.55.

In late 2022, Pro-Gen (Thunder Bay) Inc. ("Pro-Gen"), a subcontractor to the Project Contract, commenced a claim against Razar Construction relating to amounts owing for works performed. Pro-Gen obtained a default judgement and served a Notice of Garnishment in the amount of $207,637.68 in relation to the default judgement on the First Nation.

The First Nation also received a Requirement to Pay ("RTP") from the Canadian Revenue Agency ("CRA"). The CRA demanded $281,473.77 from any amounts the First Nation would otherwise pay to Razar Construction, citing unremitted payroll source deductions.

There included an otherwise $1,913,038.14 claimed by various suppliers and subcontractors related to Razar Construction.

The First Nation, in response to the various claims for monies in relation to Razar Construction, brought an application under Rule 43 of the Ontario Rules of Civil Procedure[1] seeking an interpleader order to pay the holdback amounts into court. The First Nation sought an orderly process for the equitable distribution of the holdback amounts in relation to the claiming suppliers and subcontractors.

Positions of the parties

The First Nation disclaimed any beneficial interest in the holdback funds. It took no position as to the right of either Pro-Gen or the CRA. The First Nation simply sought to interplead the Fund.

Pro-Gen submitted that the Ontario Construction Act, R.S.O. 1990, c. C. 30 (the "Construction Act") does not apply to lands on reserve, as such lands are within the exclusive jurisdiction of the federal government. More specifically, Pro-Gen submitted that section 8 of the Construction Act is inapplicable to First Nations, citing that the provision is inconsistent with the Indian Act, 1985, c. I-5 (the "Indian Act") — therefore rendering it inapplicable to the holdback funds.

Pro-Gen equated section 8 of the Construction Act to a seizure of "personal property of an Indian or a band situated on a reserve," which is prohibited under the Indian Act.[2] In other words, Pro-Gen argued that the fund monies is not a trust fund but rather a contractual holdback for the benefit of suppliers and subcontractors alike — and upon the First Nation disclaiming beneficial interest in the fund, the fund monies became a debt payable to Razor Construction.

On the other hand, the CRA submitted that the court determine it had priority over all other claimants to the fund monies. The CRA pointed to section 227(4) of the Income Tax Act, R.S.C., 1985 c. 1 (the "Income Tax Act") in stating that withholding amounts are deemed to be held in trust for His Majesty and therefore operates to give the CRA priority over claimants.

Superior Court decision

The Superior Court first looked at the impugned contractual clauses, GC 38.1 and TP4.4.1, which read as follows:

GC 38 TAKING THE WORK OUT OF THE CONTRACTOR'S HANDS

.1 The Band Council may, at its sole discretion, by giving a notice in writing to the Contractor in accordance with GC11, take all or any part of the work out of the Contractor's hands, and may employ such means as it sees fit to have the work completed if the Contractor

.1 has not, within six days of the Band Council or the Engineer giving notice to the Contractor in writing in accordance with GC11, remedied any delay in the commencement or any default in the diligent performance of the work to the satisfaction of the Engineer

.2 has defaulted in the completion of any part of the work within the time fixed for its completion by the contract […]

TP4 TIME OF PAYMENT

.4 Subject to TP1 and TP4.5 the Band Council shall, not later than 30 days after the receipt by the Engineer of a progress claim referred to in TP4.2, pay the Contractor

.1 an amount that is equal to the value that is indicated in the progress report referred to in TP4.3.2 if a labour and material payment bond has been furnished by the Contractor, minus:

.1 an amount that is equal to 10 per cent of the amount referred to in TP4.3.2, which will be retained as a statutory holdback to be paid to the Contractor not later than 60 days after the date that the project has been deemed substantially complete, in described herein; and

.2 an amount that is equal to 2 per cent of the amount referred to in TP4.3.2, which will be retained as a maintenance holdback to be paid to the Contractor not later than 30 days after the end of the warranty period described in GC32.1.2 […]

The Court agreed with both Pro-Gen and the CRA that the legal characterization of a holdback fund is determinative of a party's right to priority. If the fund is the property of Razar Construction, both Pro-Gen and the CRA are able to claim priority. If the fund is not property of Razar Construction, the opposite result occurs.

The Court viewed the language contained within the TP4 provision as unequivocal. The TP4 provision created a fund to be retained by the First Nation and to remain available as a holdback to unpaid suppliers and subcontractors pending completion of the Project Contract. More so, the Court viewed it as reasonable to infer that the triggering of GC 38.2 created a situation that the fund operate as a holdback fund for unpaid suppliers and subcontractors, pending substantial completion of the Project Contract.

On the issue of section eight of the Construction Act being inapplicable on reserve lands, the Court was quick to reject this argument. The Court held that the decision in Skukowski v. James Conci Holdings Inc, 1998 CarswellOnt 4119 remains good law in that section eight of the Construction Act is provincial legislation of general application and therefore applicable to First Nations by operation of section 88 of the Indian Act.[3]

Lastly, the Court noted that it was not in dispute that Razar Construction was indebted to the CRA on account of unremitted source deductions. The Court cited the British Columbia Supreme Court's decision in PCL Constructors Westcoast Inc. v. Norex Civil Contractors Inc., 2009 BCSC 95 ("Norex")[4] in holding that the deemed trust fund only gives the CRA beneficial right to the property of the contractor which the contractor actually holds.

Key takeaways

First, the Northwest Angle case illustrates the importance of clear drafting in construction contracts, particularly as it relates to ownership of trust fund monies. In this case, if the contractual language was altered regarding ownership, different parties would have had different priority claims.

Second, the CRA does not have priority of trust fund monies unless the CRA's debtor has ownership over the trust fund monies.

Third, section 8 of the Construction Act is deemed a provincial law of general application meaning that construction projects on First Nations' lands may be subject to a trust on funds connected to such projects.

Should you have any specific questions about this article or would like to discuss it further, please contact any member of our global Construction & Engineering Group to begin a conversation.

[1] Courts of Justice Act, R.S.O. 1990, c. C. 43, Regulation 194: Rules of Civil Procedure [Rules of Civil Procedure].

[2] See section 89(1), Indian Act, 1985, c. I-5.

[3] The Court was also quick to dismiss Pro-Gen's submission that the lien provisions of the Construction Act are inapplicable to section 89(1) of the Indian Act, see paras 75-76.

[4] The Court specifically noted that the ratio in Norex has been adopted in Ontario.