When a successful claimant under the Construction Dispute Interim Adjudication (Adjudication) provisions in the Construction Act1 does seemingly everything right (obtains a favourable order and agrees to hold funds in escrow pending judicial review, which is ultimately dismissed), can insolvency law still strip those funds away? As Re Earth Boring Co. Limited et al. demonstrates, the answer is a sobering (and likely correct) yes.

Case summary

In Re Earth Boring Co. Limited et al., 2026 ONSC 1242, the Ontario Superior Court of Justice (Commercial List) (Re Earth Boring) addressed competing claims to approximately CA$337,000 held in escrow. Earth Boring Co. Limited (Earth Boring) had originally retained Tulloch Geomatics Inc. (Tulloch) to provide surveying services, and a payment dispute led to an order (the Determination) made pursuant to the interim adjudication provisions contained in section 13 of the Construction Act requiring Earth Boring to pay Tulloch CA$337,390.62 (the Payment). Earth Boring brought an application for judicial review of Adjudication Order and the parties entered into a tolling and escrow agreement, under which the Payment was held in escrow by Earth Boring's legal counsel pending the outcome of Earth Boring's application for judicial review. Under the Construction Act, a party seeking leave for judicial review, must either pay the Adjudication Order or obtain a stay of the determination, otherwise payment of the determination is due 15 days after the determination is communicated to the parties. To obtain a stay, the party seeking the stay must establish, on a balance of probabilities that:

  • There is a serious issue to be resolved on judicial review;
  • The moving party will suffer irreparable harm if a stay is refused; and
  • The balance of convenience favours granting a stay.2

The test is applied in a holistic fashion. The three factors are not watertight compartments or a series of independent hurdles, but are instead, “interrelated in the sense that the overriding question is whether the moving party has shown that is in the interest of justice to grant a stay.” In the context of applications for judicial review of adjudication determinations under the Construction Act, the court has granted a stay where not all prongs of the test for a stay were met but the disputed amounts were paid into court.3

In this instance, the parties agreed for the funds to be held in counsel’s escrow account, pending the outcome of Earth Boring’s application for judicial review. The funds were transferred to the escrow account in late 2024, however, and critically, the escrow agreement did not expressly mention or expressly create a trust over the funds.

On April 15, 2025, Earth Boring commenced proceedings under the Bankruptcy and Insolvency Act (BIA), which were converted to proceedings under the Companies' Creditors Arrangement Act (CCAA) only two days later. On that same day (April 17, 2025) the Divisional Court dismissed Earth Boring's application for leave for judicial review, effectively confirming the Adjudication Order in Tulloch's favour.

Earth Boring's shares were subsequently sold pursuant to a subscription agreement approved by the court through a reverse vesting order in the context of the CCAA proceedings, under which the escrow funds were classified as a retained asset of the newly constituted Earth Boring entity (NewCo), while Tulloch's claims were transferred to Earth Boring’s ResidualCo, which was later adjudged bankrupt. Inconsequentially, on April 25, 2025, the Divisional Court issued its order confirming the decision reflected in its April 17, 2025 endorsement.

The central question before the Court was whether the escrow funds were the property of Earth Boring or constituted property held in trust for Tulloch. Tulloch relied on a line of authority from Acepharm Inc., Re and Greenstreet Management Inc. (Re), in which Courts found that funds held in solicitors' trust accounts were impressed with a trust and therefore fell outside the bankrupt's estate. By contrast, Earth Boring relied upon s. 70(1) of the BIA and a line of authority stemming from Canadian Credit Men's Trust Association Limited v. Beaver Trucking Limited, which provided that a bankruptcy order takes precedence over all judicial attachments and executions, unless they have been completed by payment to the creditor, which was not the case as it relates to Tulloch, as the funds remained in escrow at the time of the commencement of the insolvency proceedings.

The Court, drawing from the Court of King’s Bench of Alberta’s decision in Transtrue Vehicle Safety Inc. v. Werenka (Werenka), found in favour of Earth Boring, holding that the escrow agreement did not establish a trust and that the absence of certainty of intention, was fatal to Tulloch’s position. Drawing on Werenka, and cases cited therein, the Court concluded that where a bankruptcy event intervenes before a judgment is fully executed (i.e., before payment to the creditor), s. 70 of the BIA applies and the trustee in bankruptcy (or, in this case, Newco as the successor entity) prevails, even where the result may appear excessively “harsh” on the opposing party. Ultimately, the Court directed the escrow agent to release the funds to Newco in accordance with the scheme approved under the CCAA proceedings.

Securing funds for future successful adjudication claimants

Establishing a genuine trust over the funds

Re Earth Boring appears to present a reasonably clear roadmap as to what would, and would not, be sufficient to protect a successful adjudication claimant’s funds from insolvency risk. As is evident, the single most important lesson is that the funds must be impressed with a proper trust if they are to be excluded from a debtor's estate under s. 67(a) of the BIA; all three elements of a trust must be present (those being: certainty of intention, subject matter and object). The escrow agreement in Re Earth Boring did not mention the notion of a trust and the evidence supported the fact that such intention never existed (at paras 62-63), unlike in Greenstreet where funds deposited with a solicitor “in trust” with no unilateral right of return established the necessary trust ingredients (at para 57). A successful claimant in a Construction Act adjudication seeking to protect funds that have been awarded should therefore consider the following:

  • Incorporating express trust language in the holding agreement: The agreement governing the funds, whether termed an escrow agreement or otherwise, should explicitly state that the funds are held "in trust" and identify the trust's purpose. The Court drew a sharp distinction between a bare escrow and a true trust, finding that the absence of any reference to a trust in the Re Earth Boring escrow agreement was a threshold problem as it relates to “certainty of intention" (at para 62). Such an agreement should clearly articulate: (a) that the parties intend the funds to be held in trust; (b) the specific funds constituting the trust property (certainty of subject matter); and (c) the beneficiaries and the conditions for distribution (certainty of object) (at para 50).
  • Payment into (not through) a dedicated trust account: In both Acepharm and Greenstreet, funds were paid to a lawyer "in trust," as opposed to in Re Earth Boring where the funds had temporary passage through a law firm's "mixed use" trust account before landing in an escrow account, which was given little weight by the Court as it relates to the intention to create a trust (at para 15).

The limits of the "contingent interest" argument

Tulloch attempted to argue that, even without a trust, Earth Boring's interest in the escrow funds was merely "contingent" on the outcome of its motion for leave, and that accordingly, the funds should not form part of the estate (at para 68). Again, following the reasoning in Werenka, the Court rejected this notion, acknowledging that treating the posted funds as a s. 67(a) trust simply because the outcome is undetermined runs afoul of s. 70; where bankruptcy intervenes before litigation is adjudicated and judgement fully executed, the trustee in bankruptcy prevails (at para 76). Hence, parties should be aware that the mere contingent nature of a claim is insufficient to properly protect a claimant in such circumstances.

Alternative measures

Beyond establishing a trust, a successful adjudication claimant should also consider:

  • Active participation in any insolvency proceedings: As noted by the Court, Tulloch was aware of the insolvency proceedings and in communication with the Monitor’s counsel but chose not to oppose or seek clarification regarding the status of the escrow funds prior to the closing of the Subscription Agreement (at para 23).
  • Prompt enforcement of the adjudication order: Rather than agreeing to defer enforcement pending judicial review, successful claimants should move to immediately enforce and collect payment, thus, removing the risk entirely; s. 70(1) of the BIA provides a safe haven where executions have been completely executed by payment to the creditor (at para 35).
  • Seeking a security interest: Citing Toronto-Dominion Bank v. Phillips, the Court noted that execution creditors are not secured creditors (at para 39). Therefore, where enforcement is to be deferred, the claimant should consider whether a registrable security interest over the funds (or other assets) or a personal guarantee can be attained.

Summary

Re Earth Boring serves as a stark reminder that winning an adjudication is only part of the battle and that without the proper measures, a successful claimant's recovery can be swept away by an untimely insolvency filing. Claimants should be cognizant of the risks associated with standard escrow arrangements and insist on agreements that satisfy the three certainties of a trust if they wish to shield unpaid adjudication proceeds from the reach of a trustee in bankruptcy. Equally important, claimants should not remain passive bystanders in insolvency proceedings but should act swiftly to enforce orders and secure interests before restructuring transactions close. Taken together, these practical steps offer a meaningful framework for protecting adjudication claimants in an area of law where timing and drafting precision can make all the difference.