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Equity - Statute Paramountcy. Urban Mechanical Contracting Ltd. v. Zurich
In Urban Mechanical Contracting Ltd. v. Zurich (Ont CA, 2022) the Court of Appeal considered rescission where it may prejudice the rights of third parties. One issue was whether the bond issuer could rescind the bond contract under the common law while sub-contractors had relied upon it to perform the work under a statute, the Construction Lien Act:Can Rescission Co-Exist with the Construction Lien Act?
[40] The appellant Trades argue that s. 69 of the Construction Lien Act, R.S.O. 1990, c. C.30,[2] prevents Zurich from rescinding the Payment Bond as they have valid claims against Zurich pursuant to the Bond. They claim that equitable remedies such as rescission cannot undermine their statutory right and that, if Zurich’s rescission action is sustained, their right to claim on the Payment Bond pursuant to s. 69, would be improperly extinguished.
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[43] Legislation supersedes a common law remedy, including equity where it has done so clearly and unambiguously: Ruth Sullivan, The Construction of Statutes, 7th ed. (Markham: LexisNexis Canada Inc., 2022), at pp. 530-32.
[44] As such, a statutory scheme may oust equitable rights that would otherwise be available but only where the legislature expressed its intention to do so with “irresistible clearness”: Moore v. Sweet, 2018 SCC 52, [2018] 3 S.C.R. 303, at para. 70; KBA Canada, Inc. v. Supreme Graphics Limited, 2014 BCCA 117, 59 B.C.L.R. (5th) 273; Zaidan Group Ltd. v. London (City) (1990), 1990 CanLII 2624 (ON CA), 71 O.R. (2d) 65 (C.A.), at para. 11, aff’d 1991 CanLII 53 (SCC), [1991] 3 S.C.R. 593; and Neles Controls Ltd. v. Canada, 2002 FCA 107, 222 F.T.R. 319, at para. 15.
[45] In order to decide whether legislation ousts a common law remedy, the court must begin by “analysing, identifying and setting out the applicable common law, after which the statute law's effect on the common law must be specified by determining what common law rule the statute law codifies, replaces or repeals, whether the statute law leaves gaps that the common law must fill and whether the statute law is a complete code that excludes or supplants all of the common law in the specific area of law involved”: 2747-3174 Québec Inc. v. Québec (Régie des permis d’alcool), 1996 CanLII 153 (SCC), [1996] 3 S.C.R. 919, at para. 97, per L’Heureux-Dubé J.
[46] The Construction Lien Act clearly ousts certain equitable rights. For instance, it precludes a subcontractor who was entitled to, but did not register a construction lien for unpaid work as provided by the Construction Lien Act, from claiming the amount of the lien in unjust enrichment. This is the “precise sort of situation that the Construction Lien Act was designed to address and augmenting the scope of claims available would undercut the balance established by the Act”: Tremblar Building Supplies Ltd. v. 1839563 Ontario Limited, 2020 ONSC 6302, 454 D.L.R. (4th) 546, at para. 18.
[47] In deciding whether the legislative scheme in s. 69 ousts rescission, it is necessary to look at the situation s. 69 was designed to address.[3] At common law, tradespeople could not sue upon a payment bond because they were not parties to the bond, and had no privity of contract with the surety. To avoid this problem, modern payment bonds used trust language: Valard ConstructionLtd. v. Bird Construction Co. 2018 SCC 8, [2018] 1 S.C.R. 224, at para. 53, per Karakatsanis J. Additionally, at common law, a bond was “effective” when it was signed, sealed and delivered: Paul D’Aoust Construction Ltd. v. Markel Insurance Co. of Canada (1999), 1999 CanLII 1732 (ON CA), 120 O.A.C. 243 (C.A.), aff’d 2001 SCC 84, [2001] 3 S.C.R. 744.
[48] Section 69 was designed to replace the common law actions based on trust bonds with a direct statutory action between the surety and the trades. This served to resolve any potential problem arising from the lack of privity of contract between them. As explained in a report prepared by the Advisory Committee on the draft Construction Lien Act, in 1982:While the purpose of the bond is to protect the suppliers of services or materials, those suppliers cannot sue upon it, at common law, because they have no contractual relationship with the bonding company. To remedy this problem a trust form of bond has recently become common. There may still be some doubt as to the effectiveness of this bond form. Section [69] removes all doubt and permits suppliers of services or materials to sue upon a labour and materials bond. [Emphasis added.] [49] More recently, at Chapter 10 of their report to the Ministry of Attorney General of Ontario, Striking the Balance: Expert Review of Ontario's Construction Lien Act (delivered April 30, 2016), Bruce Reynolds and Sharon Vogel note that:Surety bonds guarantee, among other things, payment of either fifty percent or one hundred percent of the amounts owed by general contractors to the suppliers of labour and materials, and guarantee the owner that, in the event of the insolvency of the general contractor, construction will be completed. [Emphasis added.] [50] However, the Construction Lien Act does not explicitly address the trades’ right of action on the payment bond when the bond agreement was founded on fraud. Nor is there anything in the legislative record to show whether the legislature specifically intended s. 69 to sustain the bond even in the face of fraud. And finally, the parties have adduced no cases that specifically address the issue of fraud in the issuance of the bond. As such, it is not appropriate to foreclose this argument at this stage of the proceeding without hearing full submissions on this issue.
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