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Dear Gareth,

I am attaching the case as a text file, COMM.TXT, which I hope you will receive and be able to open all right. Let me know if it doesn't work.

Lionel

Indexed as: Commercial Union Assurance Co. of Canada v. Surrey (City)

Between

Commercial Union Assurance Company of Canada, petitioner (appellant), and

City of Surrey, Ricketts-Sewell, Imperial Paving Ltd., Interpave Precast Systems, Labour Standards Board, Vanport Enterprises Ltd., Coast Tractor, Midpoint Sand & Gravel, Western Supplies Ltd., RDM Enterprises Ltd., KWH Pipe, Jack Cewe Ltd., Columbia Bitulithic, Construction Aggregates, Delta Turf Farms, Mainland Sand, Pacific View Contracting, McCallum Concrete, Action Excavating, Pacific Prebenched Ltd., Nordell Trucking, View Point Sand & Gravel, ABC Pipe Cleaning, Arctic Portable Buildings, AE Concrete Precast Products, Thompson Trucking, respondents (respondents)

[1997] B.C.J. No. 656

Vancouver Registry No. CA021686

British Columbia Court of Appeal
Vancouver, British Columbia
McEachern C.J.B.C., Esson and Proudfoot JJ.A.

Heard: October 2, 1996.
Judgment: filed March 19, 1997.
(34 pp.)

Reasons for judgment were delivered by Esson J.A., concurred in by Proudfoot J.A. Dissenting reasons were delivered by McEachern C.J.B.C. (para. 32).

[para1] ESSON J.A.:-- The issues in this case arise out of a contract entered into in 1993 between the respondent City of Surrey and United Contractors Ltd. ("United") to carry out road construction. As required under the contract, United arranged to have the petitioner provide a performance bond guaranteeing performance by United. The other respondents were subcontractors of United. I will generally refer to the petitioner as "the surety", the respondent Surrey as "the owner", and to the other respondents as "the subcontractors".

[para2] At the time of default, United was indebted to the subcontractors for work and materials in an amount of some $900,000. Upon default, Surrey called upon the surety to complete the contract and it did so. The parties agree that, at completion, some amount remained owing to the subcontractors for work done before default. They also agree that the surety suffered a loss in completing the contract, net of all monies paid or payable to it by Surrey. The subcontractors assert that the amount owing to them exceeded $250,000 -- the surety says it was less than that. The surety claims that its loss exceeded $125,000 -- the subcontractors say it was less. That disagreement may eventually have to be resolved by further proceedings but does not affect the principle. By agreement of the parties, Surrey has retained $125,000 in its hands pending resolution of the question whether the surety's claim arising out of completion costs takes priority over the subcontractors' claim as beneficiaries of the trust created by s. 2(1) of the Builders Lien Act, R.S.B.C. 1979, c. 40.

[para3] The parties stated a case for the opinion of the Court on these questions:

"1. Do the trust provisions of section 2 of the Builder's Lien Act apply to the Project?

2. If yes, is the Surety entitled to the Disputed Contract Funds in priority to the Subcontractors' Claims?"

[para4] Because the work was carried out on a highway, no lien rights were available to the subcontractors. Prior to the hearing in the Supreme Court, the parties agreed that the first question must be answered in the affirmative. The stated case therefore proceeded only on the second question. The owner, having no interest in the outcome, took no part in the proceedings. The learned chambers judge, for reasons which are now reported at (1996), 27 C.L.R. (2d) 106, held that the second question should be answered in the negative. The surety now appeals.

[para5] The arguments advanced on behalf of the subcontractors were summarized thus at p. 114 of the reported reasons:

"A. The Surety is a "contractor" pursuant to the provisions of sections 1 and 2 of the Builders Lien Act and accordingly if the $125,000 is paid to the surety, it becomes impressed with a trust and is immediately payable to the Subcontractors.

B. In the circumstances of this case, a trust arises over the unpaid contract funds in the hands of Surrey given that Surrey, before the default, had notice of the failure of United to pay the subcontractors.

C. A section 2 trust arises over the unpaid contract funds in the hands of Surrey by operation of law once Surrey claims a set-off and becomes a de facto "creditor" of the general contractor for amounts which may be incurred to complete the project in excess of the general contract price."

[para6] The subcontractors' case is based on s. 2(1) of the Builders Lien Act which reads:

"2. (1) All sums received by a contractor or subcontractor on account of the contract price are and constitute a trust fund in the hands of the contractor or of the subcontractor, as the case may be, for the benefit of the owner, contractor, subcontractor, Workers' Compensation Board, workers and material men. The contractor or the subcontractor, as the case may be, is the trustee of all those sums received by him, and, until all workers and all material men and all subcontractors are paid for work done or material supplied on the contract and the Workers' Compensation Board is paid any assessment with respect to it, shall not appropriate or convert any part of it to his own use, or to any use not authorized by the trust."

The chambers judge found against the subcontractors on the first issue, holding that the surety does not come within the statutory definition of "contractor" which requires that there be a contract "with ... an owner or his agent" to do work or furnish materials. I agree with that conclusion.

[para7] The chambers judge also found against the subcontractors on the second argument which, she held for reasons stated at para. 37 of her reasons, is "... simply untenable in British Columbia". I agree with that conclusion which is required by the plain language of s. 2(1).

The chambers judge found for the subcontractors on the third ground. After a lengthy discussion of the issues and the authorities, she concluded her reasons thus:

[para8]

"49 For the Surety to claim entitlement to the $125,000, it must assert a claim against United as debtor. Thus, when the Surety receives the money, it does so as a creditor of United. Then, the principle of constructive receipt applies; the moneys are deemed to have been received by the contractor, and they are impressed with a trust in the hands of the Surety in favour of the Subcontractors.

50 This conclusion accords with sound policy in the construction arena. The trust fund is meant to provide security to subcontractors and suppliers in the event of a default by the contractor such as occurred here. If subcontractors are held to rank after a surety, they are denied the very remedy the legislature intended to provide, subject to fairness to owners. Sureties are not owners. They are in the best position to extract the appropriate security from their principals.

51 Subcontractors ought not to be left unpaid for their contribution to a construction project. To award the $125,000 to the Surety would allow it or its indemnitors to reap a windfall at the expense of those whom the legislature has striven to protect.

52 I reach that conclusion on the basis that the value of the work done and materials supplied by United, before it was rendered incapable of completing the contract, was valued by Surrey's consultants when they approved progress claim #6 for the work that had been completed and the materials that had been supplied before March ll, 1994. Neither Surrey nor the Surety can now resile from that valuation."

[para9] Before us, counsel for the subcontractors conceded that the last two paragraphs are based on an erroneous view of the facts. It is common ground that progress claim #6 has no bearing on the issue whether the surety's costs of completion exceeded its recoveries. Mr. Logan also concedes that, if the surety succeeds in its claim, it will not reap a windfall. It will simply have come out even.

[para10] Para. 50 of the reasons sets out considerations which, if the analysis in para. 49 is correct, may be irrelevant. The real issue is whether the principle of constructive receipt applies. If it does, the sum of $125,000, upon being paid to the surety, would constitute trust funds for which it must account to the subcontractors. The practical result is that the subcontractors would be entitled to the funds in priority to the claim of the surety.

[para11] The principle of constructive receipt was laid down by the Supreme Court of Canada in Minneapolis-Honeywell Regulator Co. Ltd. v. Empire Brass Mfg. Co. Ltd., [1955] S.C.R. 694, a case from this Province. The issues arose out of the failure of the heating subcontractor to complete the work it had undertaken in the construction of four schools. Minneapolis-Honeywell had undertaken to supply and install heating controls under a contract with the subcontractor. The defendant Empire Brass was the principal supplier of materials to the subcontractor for the four schools and on earlier contracts. While the subcontractor was working on the school contract, Empire Brass took a general assignment of present and future book accounts as security for the debt to it. Minneapolis-Honeywell, having failed to file a mechanic's lien within time and thus having lost its right to a lien, took judgment against the subcontractor for the amount owed to it. It then brought action based on its position as a trust beneficiary under s. 2(1) (which was then s. 19 of the Mechanic's Lien Act, R.S.B.C. 1948, c. 205) claiming that the funds received by Empire Brass pursuant to its assignment were received in breach of trust. The case is somewhat complicated by an issue as to whether the funds received by Empire Brass came from the school contract or other contracts. As a result, it was sent back to the trial court for an accounting but, for purposes of the present discussion, it may be assumed that the debts sued for in the action did not flow from the school contract and that Empire Brass was therefore not a competing trust beneficiary.

[para12] Minneapolis-Honeywell succeeded in the trial court, failed in this Court, and thus was the appellant in the Supreme Court of Canada. Rand J., who gave the opinion of the majority finding in favour of Minneapolis-Honeywell, said at pp. 696-697:

"The appellants were, therefore, cestuis que trust of the moneys received by the sub-contractor. The mode of payment followed by the contractor toward the sub-contractor, Irvine & Reeves Limited, and the respondent is given in the reasons of my brother Locke and I will not repeat it; but apart from the special features, I cannot interpret the word "received" in s. 19 as not including money paid to an assignee. The money "received" on account of the contract is the same as that paid by the contractor: payment the correlative of receipt. The assignee acts through the right and power of the assignor; and the receipt by him is likewise that by the creditor. If this were not so, the entire purpose of the section could be nullified by an assignment contemporaneous with the contract. S. 16 declares that

'no assignment by the contractor or any subcontractor of any moneys due in respect of the contract shall be valid as against any lien given by this Act ...'

But this does not prevent valid payment to the assignee prior to a notice of lien. The statute contemplates payments to the contractor whether direct or to his assignee, but these remain subject both to s. 16 as respects liens and to s. 19 as to the beneficiaries of the trust. The assignee of such moneys must either see to the satisfaction of the rights under the trust, either directly or by way of subrogation to them, or run the peril of participating in a breach of it. I have no doubt that no assignment can destroy the rights created by s. 19 in the moneys so paid over."

[para13] That passage has been followed and applied in innumerable cases since 1955, generally in cases in which the contest has been between, on the one hand, the trust beneficiaries and, on the other, holders of assignments or judgment holders relying on garnishee orders or other forms of execution. In respect to such relationships, the law, as laid down by Rand J. in 1955, is settled. The trust takes priority. But, with one exception to which I will refer later, we have been referred to no case authority dealing with a contest between a surety and the lien beneficiaries.

[para14] I turn then to consider the nature of the right relied upon by the surety. Its general nature has been recognized by the courts of equity for centuries and has been partially codified by what is now s. 30 of the Law and Equity Act, R.S.B.C. 1979, c. 224, which reads as follows:

"30. Every person who, being surety for the debt or duty of another or being liable with another for any debt or duty, pays the debt or performs the duty is entitled to have assigned to him or to a trustee for him every judgment, specialty or other security which is held by the creditor in respect of the debt or duty, whether the judgment, specialty or other security is or is not deemed at law to have been satisfied by the payment of the debt or performance of the duty. The person is entitled to stand in the place of the creditor and to use all the remedies and, if necessary and on a proper indemnity, to use the name of the creditor in any action or other proceeding at law or in equity, in order to obtain from the principal debtor, or a co-surety, co-contractor or co-debtor indemnification for the advances made and loss sustained by the person who has paid the debt or performed the duty, and the payment or performance made by the surety is not pleadable in bar of any action or other proceeding by him. No co-surety, co-contractor or co-debtor is entitled to recover from any other co-surety, co-contractor or co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties themselves, the last mentioned person is justly liable."

[para15] The specific application of the general rule in this case arises from the undisputed principle that, where a contractor fails to complete the work and the owner carries the work to completion at its own cost, the owner is entitled to set off its costs of completion against any balance of the contract price remaining owing to the contractor. So, in this case, had the owner carried the work to completion itself, it would have owed nothing to United and would have been entitled to pursue United for any amount by which its costs exceeded the amount due to United.

[para16] That point was decided by this Court in Canadian Indemnity Co. v. British Columbia Hydro & Power Authority et al. (4 October 1976), Vancouver [unreported]. In that case, the contest was between the surety which, as in this case, had completed the work after the contractor had failed, and the contractor's bank claiming under a general assignment of book accounts. At pp. 8-9, Bull J.A., giving judgment for the Court, said:

"All of the respondent Surety's rights with respect to the fund held by the Authority to override, or give it priority to, the claims of the Contractor, its Trustee, the general creditors and, in particular, the principal secured creditor, the appellant Bank, rested firmly on the application of the equitable doctrine of subrogation. The respondent Surety claimed, and the trial Judge found, that it was entitled to be subrogated to the rights of the Authority on default or failure of the Contractor to complete the contract. In such an event, the Authority was entitled both at law and under the contract with the Contractor, to set-off against any moneys to become due under the contract its loss or damage, or cost of completion of the project, which resulted from the failure of the Contractor. The law has long provided that a surety who carries out his obligations to pay or perform what a contractor has failed to pay or perform, is entitled to the rights of the person to whom the surety was obligated to so pay or perform. In this case that would include the Authority's right to hold back and use funds to become due to the Contractor to complete the obligations failed to be completed by it, and this right, of course, would have priority over the Contractor, any persons, such as the Bank, claiming under it or any encumbrancer of those funds claiming through the Contractor. The security of the appellant Bank by virtue of its Assignment of Book Accounts and debenture would only be effective after the Authority's right of set-off. It seems hardly necessary to cite authorities in support of the foregoing proposition. However, with respect, I think it was well and simply set out by Johnson, J.A., in giving the judgment of the Appellate Division of the Alberta Supreme Court in Re Jason Construction Ltd. (1972), 29 D.L.R. (3d) 623 when he said at p. 625:

'The surety for a contractor who fails to complete his contract is entitled to receive from the owner sufficient of the balance of the contract price, including the holdbacks, as is necessary to reimburse him for the cost of completing the building.'"

[para17] Two points made in that passage are of particular significance in relation to this case. The first is that the surety's rights with respect to the fund rested on the application of the equitable doctrine of subrogation. The second is the finding that, in a contest between the surety and the bank as assignee of the contractor's book accounts, the surety's right must prevail over the rights of the bank or others "claiming through the contractor".

[para18] Although s. 30 is sometimes said to be the primary basis of the law in this area, its scope is limited in its application to a "judgment, specialty or other security" held by the creditor. The right asserted by the surety in this case is not a judgment, specialty or other security held by the creditor. The creditor (owner) had no right capable of assignment. The right of which the surety seeks to take advantage is one which the owner would have had if it had borne the cost of completion. In those circumstances, it seems doubtful that the surety's claim is within s.30.

[para19] The relationship between that provision and the equitable doctrine of subrogation is explained in H.A. de Colyar, Law of Guarantees and of Principal & Surety, 3d ed. (London: Butterworth, 1897). The author, in discussing the rights of the surety against the creditor, says at pp. 326-27:

"There formerly existed a remarkable exception to the general right of the surety to have all securities held by the creditor made over to him on payment of the debt. This exception was founded upon highly technical reasons. For it was held that, where a surety paid off the bond debt of his principal, for which he was bound, he could not require the creditor to assign to him such bond debt, because it was satisfied and extinguished by the very act of payment by the surety."

The author goes on to note that the law was altered in 1856 to remove that exception by the enactment of the 5th section of the Mercantile Law Amendment Act, 19 & 20 Vict., c. 97, which is now s. 30 of our Law and Equity Act.

[para20] The point is that s. 30 is only one rather specific aspect of the broader doctrine, the breadth of which is stated thus by de Colyar at p. 330:

"Not only is a surety, who pays off his principal's debt, entitled to a transfer of securities held by the creditor, but he is also in all respects entitled to all the equities which the creditor could have enforced."

[para21] That language aptly describes the circumstances of this case. Had the owner completed the work itself rather than calling on the surety, it would have been entitled to set off its costs of completion in determining the balance. That is an equity which the owner could have enforced against the contractor had it borne the costs of completion.

[para22] The subcontractors now take no issue with the existence of the surety's right to be subrogated to the right of set off which the owner would have had. They say, however, that the position of the surety is the same as that of the assignee in Minneapolis-Honeywell. Each has a right to be paid by the owner but that right is subject to the prior right of the trust beneficiaries. Had the owner completed the project and exercised its right to set off the costs of completion against the balance owed to the contractor, it would thus have discharged its indebtedness to the contractor.

The surety is entitled to be paid the $125,000 in the hands of the owner because the contractor is indebted to it for the costs of completion. To paraphrase the language of Rand J. in Minneapolis-Honeywell, payment to the surety is the correlative of receipt by the contractor and therefore the amount paid is subject in the surety's hands to the s. 2(1) trust.

[para23] There are distinctions between the position of the surety and that of the assignee in Minneapolis-Honeywell. One is that the surety, as was held by this Court in the Canadian Indemnity case, as between itself and the assignee, has the superior equity. That in itself does not defeat the equity of the trust beneficiaries. It may be more significant that the reason assigned by Bull J.A. for finding the surety's equity to be superior is that the surety's right would have priority over any person, such as an assignee, claiming under the contractor. The same consideration is reflected in the sentence in the reasons of Rand J. immediately following the statement, in the passage quoted at para.[12] supra, regarding payment being the correlative of receipt:

"The assignee acts through the right and power of the assignor; and the receipt by him is likewise that by the creditor."

The surety does not act through the right and power of the contractor, and does not claim under the contractor. Does that fact preclude the payment to the surety being treated as the correlative of receipt by the contractor? The significance of that question is, of course, that the s. 2(1) trust applies only to sums received by the contractor on account of the contract price. In my view, payment to the surety would be a payment on account of the contract price. The only reason why the owner is willing to pay out $125,000 is that it still owes that amount to the contractor under the contract. While the surety does not act through the right and power of the contractor or claim under or through the contractor, the significant fact is that the object of the exercise is to enable the surety to recover the contractor's obligation to it. The purpose of the statutory trust is, as the chambers judge said, to provide security to subcontractors and suppliers in the event of default by the contractor.

[para24] The purpose of the equitable right of subrogation is explained in Rowlatt on The Law of Principal and Surety, 4th ed. (London: Sweet & Maxwell, 1982) at p. 131:

"The general principle here is the equity of the surety, subject to the paramount right of the creditor to be paid, to have the creditor's powers applied to produce an equitable result as between all persons liable. The aim is to ensure that the person primarily liable should bear the whole burden in relief of others, or if there is a deficiency that it should fall equally upon those with secondary liability." [Footnotes omitted.]

It is equitable, as between the surety and the defaulting contractor, that the contractor should bear the whole burden. But is it equitable that, as between the surety and the trust beneficiaries, the latter should bear a greater burden so that the surety will be saved harmless? At this point, it is appropriate to weigh in the scales the considerations mentioned by the chambers judge in para. 50 of her reasons:

"If subcontractors are held to rank after a surety, they are denied the very remedy the legislature intended to provide, subject to fairness to owners. Sureties are not owners. They are in the best position to extract the appropriate security from their principals."

A related consideration is that the surety is in the business of acting as a surety and is therefore in a position to assess the risks of loss and to fix its premiums accordingly.

[para25] For these reasons, I conclude that the chambers judge was right to hold that the principle of constructive receipt would apply to the funds held by the owner when paid to the surety, that they then would be impressed with a trust in favour of the subcontractors and that it therefore follows that the funds should be paid to the subcontractors.

[para26] I referred earlier to a decision which dealt with a contest between a surety and mechanic's lien trust beneficiaries. That case is the decision of the Court of Appeal of Manitoba in Royal Bank of Canada v. Wilson (1963), 42 W.W.R. 1, aff'g (1963), 41 W.W.R. 465. In outlining the facts, which were more complex than those in the present case, I will use only the first names of the several corporations involved. Commonwealth was the general contractor to construct a building on the campus of the University of Manitoba on land owned by the provincial Crown. Commonwealth subcontracted the plumbing and heating work to Randall which in turn subcontracted part of it to Craftmaster. Before contracting with Craftmaster, Randall took a performance bond from Mr. Blick guaranteeing completion of Craftmaster's work. Craftmaster became bankrupt. Mr. Blick completed the work at a cost to him of some $14,000.00, which amount he had paid to another heating contractor (Western) to perform the work. At the end of the job, Randall paid into court some $18,000.00 being the balance due to Craftmaster. The competing claims against that fund were Mr. Blick as surety, the Royal Bank under a general assignment, and a number of mechanic's lien trust beneficiaries who were, in turn, entitled to be paid the full amount owing to them in priority over the bank in respect of the balance of $4,000.00 then remaining. The latter aspect of the decision was a straight forward application of Minneapolis-Honeywell, supra.

[para27] All five members of the court concurred in the result; there are two judgments which differ somewhat in their reasoning. The majority judgment is that of Guy J.A. for himself and two others. The minority judgment is that of Freedman J.A. (later C.J.M.) for himself and one other. Guy J.A. began his discussion of the first issue at p. 10 by referring to Minneapolis-Honeywell as establishing that monies paid to an assignee of the contractor or subcontractor are monies paid to that contractor or subcontractor. After noting that the relevant section of the Manitoba statute was essentially the same as s. 19 of the British Columbia Mechanic's Lien Act, which was dealt with in Minneapolis-Honeywell, he went on to say, at p. 11:

"The question then arises as to whether or not the money paid out by Blick under his separate guarantee ($14,177.71) on behalf of Randall, to get the job done, is money owing and payable to Craftmaster, the subcontractor? In my opinion, it is not."

Although it was not cited to the learned trial judge or to this court, the Ontario court of appeal decision in Len Ariss & Co. v. Peloso [1958] OR 643, deals with this matter. McGillivray, J.A. says (at p. 656):

"The computation of the amount owing the contractor at the above time should be the sum remaining after deducting from the contract price the following four items: (1) cost of completion; (2) any outstanding accounts of the Pelosos against the contractor; (3) damages, if any, awarded Pelosos for delay in completion; (4) past payments by Pelosos to the contractor."

Pelosos in this case were the "owners;" but, in my opinion, this does not affect the principle.

Substituting the word sub-subcontractor for contractor, where it appears in the foregoing quotation, it will be seen that the cost of completion (by Randall itself or by Randall's guarantor Blick) should be deducted before arriving at the amount payable to Craftmaster on account of the contract with Craftmaster. Counsel agreed that they have no quarrel with the principle of subrogation enunciated by the learned trial judge.

Thus, the sum of $14,177.71 belonged to Blick before it was paid into court; and although counsel for the suppliers argued to the contrary, I must hold that ownership of that money by Blick prior to payment in, cannot change simply by payment into court.

[para28] That reasoning does not address the question, which in my view was the crucial one, whether payment to the surety of $14,000.00 would be the correlative of receipt of that money by Craftmaster. The basic reasoning was that the fund was not owed by Randall to Craftmaster because the amount owing to Craftmaster had to be net of the cost of completion. The authority for that was the decision in Len Ariss & Co. v. Peloso which was, however, concerned only with an issue between the owner and the contractor. The basic error, in my view, was in concluding that that distinction "does not affect the principle". Where the issue, as it was in Wilson and is in this case, is one between the surety and trust beneficiaries, it must be recognized that the surety is a party separate from the owner. There is no doubt that an owner can set off the costs of completion to eliminate the balance which it owes under the contract. The surety can avail itself of that right if no superior equity intervenes. Where the question is, as here, whether the surety should as a matter of equity be allowed to avail itself of that right to the detriment of third parties, it cannot be right to say that no debt exists because it has already been discharged by setting off the surety's costs against the owner's obligation for the contract balance. In Wilson, of course, the owner was no longer involved but, for the purposes of this issue, Randall was in the same position as the owner in that it owed the balance to the sub-subcontractor, Craftmaster, but had not incurred the cost of completion. The issue, in that case as in this, became one of balancing equities. In that case, as in this case, payment by Randall to the surety would be the correlative of receipt by the sub-subcontractor. The failure to recognize that point may have flowed from the error, as I respectfully suggest it was, in the statement of Guy J.A. in the first sentence of the passage quoted, supra, that the money paid out by Blick under his guarantee was "on behalf of Randall". I suggest that the correct view is that it was paid on behalf of Craftmaster for the benefit of Randall.

[para29] It is of some interest that the decision in Wilson, supra, has, on a somewhat different point, been disapproved by this Court. In Cronkhite Supply Ltd. v. Workers' Compensation Board et al. (1978), 8 B.C.L.R. 54 at 64, this Court was invited to follow the view expressed by Freedman J.A. at p. 7 of Wilson, that it is:

"... consistent both with reason and with the specific language of the statute to conclude that rights and obligations arising under sec. 3 are referable only to the specific contract affecting the parties."

At p. 65, Taggart J.A. for the Court said:

"I think the terms 'contract' and 'contract price' are used in s. 3 to describe in a compendious way the various contracts and contract prices involved in the overall project. To hold otherwise would severely limit the benefits to be derived by the classes of beneficiaries referred to in the section."

[para30] The question whether each contract in the chain should be "sealed off" from those above and below does not arise in this case because the only contract in question is that between the owner and the general contractor. But the matter has some bearing on the authority to be accorded to the decision in Wilson. Taggart J.A. held, in effect, that Freedman J.A. had erred in failing to give to the trust provisions the broad and remedial interpretation required to be given to them. The same criticism, in my view, can be made of the different route taken by Guy J.A. to reach the same result.

[para31] For these reasons, I conclude that the chambers judge did not err in answering the second question in the negative. I would dismiss the appeal.

ESSON J.A.

PROUDFOOT J.A.:- I agree.

The following is the judgment of

[para32] McEACHERN C.J.B.C. (dissenting in part):-- Notwithstanding the complicated Style of Cause, this is a contest between a bonding company ("the surety") and unpaid subcontractors (including materialmen) on a highway contract. The bonded contractor, ("United"), having defaulted, the issue is whether any part of the unpaid balance of the contract price is impressed with a Builders' Lien trust in favour of these subcontractors or whether it is payable to the surety for completion costs. The trial judge found for the subcontractors, and the surety appeals against that decision.

[para33] The issue between the parties was tried upon an Agreed Statement of Facts. The following questions were stated:

"1. Do the trust provisions of section 2 of the Builder's Lien Act apply to the Project?

2. If yes, is the Surety entitled to the Disputed Contract Funds in priority to the Subcontractors' Claims?"

[para34] Section 2(1) of the Act provides:

"2.(1)All sums received by a contractor or subcontractor on account of the contract price are and constitute a trust fund in the hands of the contractor or of the subcontractor, as the case may be, for the benefit of the owner, contractor, subcontractor, Workers' Compensation Board, workers and material men. The contractor or the subcontractor, as the case may be, is the trustee of all those sums received by him, and, until all workers and all material men and all subcontractors are paid for work done or material supplied on the contract and the Workers' Compensation Board is paid any assessment with respect to it, shall not appropriate or convert any part of it to his own use, or to any use not authorized by the trust."

1. The Facts

[para35] The City of Surrey gave a contract to United, a general contractor, to construct a portion of a highway. As such, the project was not lienable. The surety, by a performance bond, insured the due completion of the project. There was no labour and materials payment bond. Upon default by United, there were earned but not yet payable contract monies in the approximate sum of $391,789.36. These monies, and the balance of the contract price, except for the $125,000 which is the subject matter of these proceedings, were paid to the surety and eventually to its subcontractors, some of whom where the same contractors employed by United for post-default work.

[para36] While the facts are not completely stated, counsel supplemented the information necessary to decide these questions. After giving credit for all sums received, the United subcontractors allege they are unpaid for work performed for United on this project to the extent of about $250,000, but that amount is disputed by the surety. At the time of completion, the surety alleges it will suffer a loss in excess of $125,000. That amount is disputed by the subcontractor. These issues will be tried subsequently, if necessary.

[para37] In any event, the parties all agree that $125,000 of the contract price would be held back from the surety pending the determination of entitlement to those funds in these proceedings.

[para38] The operative terms of the performance bond are:

"NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that if the Principal shall promptly and faithfully perform the Contract then this obligation shall be null and void; otherwise it shall remain in full force and effect.

Whenever the Principal [United] shall be, and declared by the Obligee [Surrey] to be, in default under the Contract, the Obligee [Surrey] having performed the Obligee's [Surrey's] obligations thereunder, the Surety [Commercial Union] may promptly remedy the default, or shall promptly

1) complete the Contract in accordance with its terms and conditions or

2) obtain a bid or bids for submission to the Obligee for completing the Contract in accordance with its terms and conditions and upon determination by the Obligee and the Surety of the lowest responsible bidder, arrange for a contract between such bidder and the Obligee and make available as work progresses (even though there should be a default, or a succession of defaults, under the contract or contracts of completion, arranged under this paragraph) sufficient funds to pay the cost of completion less the balance of the Contract price ..."

[para39] There is no question that United was declared by Surrey to be in default on March 11, 1994, and that the surety elected to "complete the contract in accordance with its terms and conditions". The surety did not elect to proceed under paragraph 2 of the bond. Mr. Logan argued that contract funds when paid or payable to the surety become impressed with a trust for the United subcontractors. Because of the view I have about the law of suretyship, as hereafter stated, it makes no difference which option was exercised by the surety. This is because the surety, when it completed the contract, did so in the shoes of Surrey. I shall return to this question in a moment. It was conceded that the surety was not a contractor or subcontractor.

[para40] The surety argues that it is entitled to receive up to the full amount unpaid on the contract as of the date of default for the purpose of completing the contract without deduction for the claims of United or its unpaid subcontractors. It relies upon the unique position of a surety at law, and upon s. 30 of the Law and Equity Act (1979) R.S.B.C. c. 224 which provides in part:

"30. Every person who, being a surety for the debt or duty of another or being liable with another for any debt or duty, pays the debt or performs the duty is entitled to have assigned to him or to a trustee for him every judgment, specialty or other security which is held by the creditor in respect of the debt or duty ..."

[para41] There is authority supporting the view that the surety is entitled to succeed on this appeal on the basis of s. 30: Saskatoon School district No. 13 v. Building Specialty Sales Ltd. [1993] 13 W.W.R. 741 (Sask. Q.B.). I do not propose to rely upon this section because there may be doubt about whether this fund can be defined as a "security." It is not necessary to decide that question. Instead, I propose to rely only upon the general law of suretyship.

2. Discussion of Issues

[para42] Contests about entitlement to contract monies, particularly claims based upon s. 2(1), are not unknown to the law. Most contests, however, have been between owners, contractors and subcontractors without the intervention of a surety. I extract the following principles from the leading authorities.

[para43] 1. No trust is created so long as the contract funds remain with the owner. This is clear from the wording of s. 2(1) and is not disputed. As already mentioned, the subcontractors' argue that the trust will arise when the retained fund of $125,000 is paid by Surrey to the surety "on account of the contract price". This principle is important because it fixes the starting point for the discussion.

[para44] 2. Only those funds due from the owner to the contractor may be claimed by subcontractors or materialmen below him: B.C. Hydro and Power Authority v. Hallcraft Construction Co. (1986), 6 B.C.L.R. (2d) 74 (B.C.S.C.); United Metal Fabricators Ltd. v. Voth Bros. Construction (1974) Ltd. (1987), 20 B.C.L.R. (2d) 274 (B.C.C.A.); Mackenzie Redi-Mix Co. Ltd. v. Miller Contracting Ltd. (1987), B.C.L.R. (2d) 283 (B.C.C.A.); Royal Bank of Canada v. Wilson (1963), 42 W.W.R. 1 at 7. In the United Metal case, this court held at p. 282: "In effect, it is any net amount due by the contractor to the subcontractor which constitutes the corpus of the trust."

[para45] In Mackenzie, this court held at p. 288:

"When Miller [the head contractor] paid all that was payable to Procon [a subcontractor] and Procon's replacement, it discharged its trust obligation to Procon and those further down that line, including Mackenzie."

[para46] 3. The general purpose of the lien legislation is to protect the claims of those who supply work and materials so long as the owner is not prejudiced. Accordingly, apart from mandatory hold back funds, which are not in issue here, an owner who completes the work after default is entitled to deduct the full cost of completion from any amount payable to a defaulting contractor or subcontractor even if this leaves subcontractors and materialmen further down the line unpaid. This conclusion, in my view, is supported by passages from Macklem and Bristow, Construction and Mechanics' Liens in Canada, Carswell Canada, 5th edit, 1985, at 319, and indeed, by Noranda Exploration Co. Ltd. v. Sigurdson, [1976] 1 S.C.R. 296.

[para47] In the former, the editors say at 319:

"In Crown Lbr. Co. v. Smythe, [1923] 2 W.W.R. 1019 (Alta. C.A.) it was held that sureties on a bond for the completion of a school building contract, who had completed the contract, were subrogated to the rights of the owner under the contract with respect to charging the cost of completion against the moneys in the hands, their rights having priority over those of the lien claimants."

[para48] The editors then go on to mention that Crown Lbr. was decided before mandatory hold backs were created and that the above must be read subject to that change. Then, with respect to Noranda Explorations Co. v. Sigurdson, (supra),the editors add, also at 319:

"In that case the Court upheld the owner's right to set off its cost of completing the contractor's abandoned contract against amounts owing to the contractor over and above the holdback amount." (emphasis added)

[para49] In my judgment, this case is governed by Noranda, the only difference being that a replacement contractor was employed in that case, while the intervention of the surety in the case at Bar, by subrogation, gave the surety the same rights of set off as were enjoyed by the owner.

[para50] The subcontractors' argument is really based upon the finding of the Chambers judge:

"49 For the Surety to claim entitlement to the $125,000, it must assert a claim against United as debtor. Thus, when the Surety receives the money, it does so as a creditor of United. Then, the principle of constructive receipt applies: the moneys are deemed to have been received by the contractor (United), and they are impressed with a trust in the hands of the Surety in favour of the Subcontractors."

[para51] It seems likely the Chambers judge extracted this proposition from the judgment of the Supreme Court of Canada in Minneapolis-Honeywell Regulator Co. v. Empire Brass, [1955] S.C.R. 694 at 696-7. In my view, however, there was no surety in that case, and the contest was between materialmen and the assignee of the book accounts of the defaulting subcontractor. The court held that, having regard to the provisions of the trust established by the Act, the trust was not defeated by the fact that the owner made payments to the assignee of the subcontractor. It was in this sense that the court held that payment to the assignee is correlative to receipt by the defaulting subcontractor.

[para52] In the case at bar, there is only a potential debtor-creditor relationship between United and the surety with respect to the fund in question until such time as the surety incurs a loss on completion, which the United subcontractors presently dispute. It seems to me there is no possibility of a surplus because Surrey would have no reason to pay the surety more than its costs of completion. In any event, I do not think this is a relevant consideration because there is no basis upon which it can be said that payment of this $125,000 to the surety in payment for its work would be correlative to receipt by United. After all, such amount would flow through to United's subcontractors leaving the state of accounts between the surety and United, if any, unchanged.

[para53] In my view, this is a case that must be decided upon the ordinary principles outlined above in the context of the law of suretyship.

[para54] In Canadian Indemnity Company v. B.C. Hydro & Power Authority et al, Unreported Cases, October 4, 1976, B-17, (B.C.C.A.), the contest was between a surety which, as in this case, had completed the work after the contractor had failed, and the contractor's bank claiming under a general assignment of book accounts. At pp. 8-9 Bull J.A., giving the judgment of the Court, stated:

"All of the respondent Surety's rights with respect to the fund held by the Authority to override, or give it priority to, the claims of the Contractor, its Trustee, the general creditors and, in particular, the principal secured creditor, the appellant Bank, rested firmly on the application of the equitable doctrine of subrogation. The respondent Surety claimed, and the trial Judge found, that it was entitled to be subrogated to the rights of the Authority on default or failure of the Contractor to complete the contract. In such an event, the Authority was entitled both at law and under the contract with the Contractor, to set-off against any moneys to become due under the contract its loss or damage, or cost of completion of the project, which resulted from the failure of the Contractor. The law has long provided that a surety who carries out his obligations to pay or perform what a contractor has failed to pay or perform, is entitled to the rights of the person to whom the surety was obligated to so pay or perform. In this case that would include the Authority's right to hold back and use funds to become due to the Contractor to complete the obligations failed to be completed by it, and this right, of course, would have priority over the Contractor, any persons, such as the Bank, claiming under it or any encumbrancer of those funds claiming through the Contractor. The security of the appellant Bank by virtue of its Assignment of Book Accounts and debenture would only be effective after the Authority's right of set-off. It seems hardly necessary to cite authorities in support of the foregoing proposition. However, with respect, I think it was well and simply set out by Johnson, J.A., in giving the judgment of the Appellate Division of the Alberta Supreme Court in Re Jason Construction Ltd. (1972), 29 D.L.R. (3d) 623 when he said at p. 625:-

'The surety for a contractor who fails to complete his contract is entitled to receive from the owner sufficient of the balance of the contract price, including the holdbacks, as is necessary to reimburse him for the cost of completing the building.'" (emphasis added)

[para55] In the case at Bar the surety, in discharging its suretyship obligation, is entitled to step into the place of the owner. If Surrey had completed the contract itself, it would have deducted the full costs of completion before it would have made any further payments to United or its subcontractors. This was what happened in Royal Bank v. Wilson, supra, where the general contractor, Commonwealth, subcontracted part of the work to Randall who further subcontracted that work to Craftmaster, but required a performance guarantee that was provided by Mr. Blick. Craftmaster went into bankruptcy whereupon Randall called upon Blick to complete the work which he did. Some of Craftmaster's suppliers claimed a trust lien on the money payable to Craftmaster. The first question was whether Mr. Blick was entitled to be reimbursed for his costs ahead of these trust claimants.

[para56] It was decided that the amount payable to Mr. Blick for completing the contract was not money earned by, or payable to, Craftmaster. Rather it was held that the amount payable to Blick was deductible from the amount available to the trust.

[para57] In giving the majority judgment, Guy J.A. wrote:

"The question then arises as to whether or not the money paid out by Blick under his separate guarantee ($14,177.71) on behalf of Randall, to get the job done, is money owing and payable to Craftmaster, the subcontractor? In my opinion, it is not.

Although it was not cited to the learned trial judge or to this court, the Ontario court of appeal decision in Len Ariss & Co. v. Peloso [1958] OR 643, deals with this matter. McGillivray, J.A. says (at p. 656):

'The computation of the amount owing the contractor at the above time should be the sum remaining after deducting from the contract price the following four items: (1) cost of completion; (2) any outstanding accounts of the Pelosos against the contractor; (3) damages, if any, awarded Pelosos for delay in completion; (4) past payments by Pelosos to the contractor.'

Pelosos in this case were the 'owners,' but, in my opinion, this does not affect the principle.

Substituting the word subcontractor for contractor, where it appears in the foregoing quotation, it will be seen that the cost of completion (by Randall itself or by Randall's guarantor Blick) should be deducted before

'arriving at the amount payable to Craftmaster on account of the contract with Craftmaster. Counsel agreed that they have no quarrel with the principle of subrogation enunciated by the learned trial judge.'" (emphasis added)

[para58] In the case at Bar, counsel also did not dispute that the surety was subrogated to the rights of Surrey.

[para59] Applying these principles to the facts of this case, it is my view that the surety, having performed the obligations of United to Surrey, is entitled to do whatever Surrey could have done. In such circumstances, Surrey would clearly have deducted the total completion costs before crediting any further part of the contract price to United for work done or materials furnished prior to default. Only a surplus of the contract price over the completion costs would be payable to United, in trust for its subcontractors.

[para60] In other words, completion costs are not funds payable to United to which a s. 2(1) trust could attach, and so much of the held back funds that have been earned by the surety are payable not on account of the contract price, but rather in payment for completion which is deductible from amounts payable to United on account of the contract.

[para61] The surety, standing in the position of Surrey, is accordingly entitled to receive its full completion costs before any amounts become payable to United on account of the contract. As a result, subject only to the possibility that there could be a surplus, the appeal must be allowed and the question stated is answered as follows:

"1. Do the trust provisions of section 2 of the Builders Lien Act apply to the project?

Answer: Not with respect to any part of the $125,000 held back by Surrey which is included in the completion costs of the surety."

McEACHERN C.J.B.C.