Her Majesty the Queen in Right of Ontario as Represented by the Minister of Training, Colleges and Universities v.Two Feathers Forest Products LP et al.

[Indexed as: Ontario (Minister of Training, Colleges and Universities) v. Two Feathers Forest Products LP]

Ontario Reports

Court of Appeal for Ontario,

Feldman, Lauwers and Strathy JJ.A.

October 2, 2013

117 O.R. (3d) 227 | 2013 ONCA 598

Case Summary

Trusts and trustees — Trusts — Quistclose trust — Ministry advancing grant moneys to limited partnership to provide skills training in two proposed plants — Grant moneys which were not spent before appointment of interim receiver not subject to Quistclose trust for benefit of ministry — Parties not intending that partnership would hold funds in trust for ministry — Funding agreement specifically providing that any unused funds would constitute debt owing to ministry — Agreement giving partnership considerable freedom to use majority of funds.

The ministry granted funds to a First Nations limited partnership to provide skills training in two proposed plants. Ultimately, two of the limited partners applied to dissolve the partnership and an interim receiver and manager was appointed. On an application by the receiver, the application judge found that grants which were not spent before the receiver was appointed were subject to a Quistclose trust for the ministry's benefit and ordered the receiver to pay those moneys to the ministry. The receiver appealed.

Held, the appeal should be allowed.

The requirements for a Quistclose trust were not met. On the issue of the intention to create a trust, it is not the subjective intention of the lender or grantor that governs but the intention of the two parties, discerned from the terms of the loan or grant. In this case, an examination of the terms of the funding agreement showed that the parties did not intend that the partnership would hold the funds in trust for the ministry. The funding agreement specifically provided that any unused funds constituted a debt owing to the ministry. Moreover, under the funding agreement, while specific funds were designated for the actual costs of training, the partnership had significant freedom to use the majority of the funds. Finally, the circumstances of the grant transaction in this case did not have many of the characteristics that caused a trust to be found in either of the two seminal cases on Quistclose trusts. It was not a situation where the limited partnership needed immediate funding to stave off bankruptcy; the funds were not needed to make a specific payment to a group of creditors or to make a specific purchase but were obtained as a basic source of business funding for a [page228] long-term project; and the funds were not advanced on a short or quickly drawn contractual agreement.

Barclays Bank Ltd. v. Quistclose Investments Ltd., [1970] A.C. 567, [1968] 3 All E.R. 651, [1968] 3 W.L.R. 1097 (H.L.); Cliffs Over Maple Bay Investments Ltd. (Re), [2011] B.C.J. No. 677, 2011 BCCA 180, 304 B.C.A.C. 116, 17 B.C.L.R. (5th) 60, 18 P.P.S.A.C. (3d) 11, 67 E.T.R. (3d) 1, [2011] 8 W.W.R. 266, 77 C.B.R. (5th) 1; Twinsectra Ltd. v. Yardley, [2002] 2 A.C. 164, [2002] UKHL 12 (H.L.), consd

Other cases referred to

Abulyha v. Montemurro, [1984] O.J. No. 962 (H.C.J.); Continental Bank of Canada v. Boekamp Manufacturing Inc., [1990] O.J. No. 1043 (H.C.J.); Cummings Estate v. Peopledge HR Services Inc., [2013] O.J. No. 2296, 2013 ONSC 2781, 2 C.B.R. (6th) 45, 228 A.C.W.S. (3d) 1195 (S.C.J.); Del Grande v. McLeery, 2000 CanLII 10425 (ON CA), [2000] O.J. No. 61, 127 O.A.C. 394, 31 E.T.R. (2d) 50, 94 A.C.W.S. (3d) 132 (C.A.), affg [1998] O.J. No. 2896, 70 O.T.C. 127, 40 B.L.R. (2d) 202, 5 C.B.R. (4th) 36, 24 E.T.R. (2d) 30, 80 A.C.W.S. (3d) 1276 (Gen. Div.); Edwards v. Glyn (1859), 2 E. and E. 29; Ernst & Young Inc. v. Central Guaranty Trust Co., [2006] A.J. No. 1413, 2006 ABCA 337, [2007] 2 W.W.R. 474, 66 Alta. L.R. (4th) 231, 397 A.R. 225, 24 B.L.R. (4th) 218, 28 E.T.R. (3d) 174, 153 A.C.W.S. (3d) 971, revg [2004] A.J. No. 600, 2004 ABQB 389, [2005] 3 W.W.R. 97, 29 Alta. L.R. (4th) 269, 365 A.R. 302, 8 E.T.R. (3d) 169, 131 A.C.W.S. (3d) 1186 [Leave to appeal to S.C.C. refused [2007] S.C.C.A. No. 9]; Gignac, Sutts v. National Bank of Canada, [1987] O.J. No. 298, 5 C.B.R. (4th) 44, 4 A.C.W.S. (3d) 172 (H.C.J.); In re Drucker (No. 1), [1902] 2 K.B. 237 (C.A.); In re Hooley, Ex parte Trustee, [1915] H.B.R. 181; In re Rogers, Ex parte Holland and Hannen (1891), 8 Morr. B.C. 243; Ling v. Chinavision Canada Corp. (1992), 1992 CanLII 7497 (ON SC), 10 O.R. (3d) 79, [1992] O.J. No. 1438, 34 A.C.W.S. (3d) 664 (Gen. Div.); Niedner Ltd. v. Lloyds Bank of Canada (1990), 1990 CanLII 6936 (ON SC), 74 O.R. (2d) 574, [1990] O.J. No. 1346, 72 D.L.R. (4th) 147, 38 E.T.R. 306, 22 A.C.W.S. (3d) 271 (H.C.J.); Ontario (Securities Commission) v. Consortium Construction Inc., [1993] O.J. No. 1408, 1 C.C.L.S. 117, 41 A.C.W.S. (3d) 18 (Gen. Div.); Smith v. Gold Key Construction Ltd., [1993] O.J. No. 157 (Gen. Div.); Teperman v. Teperman, [2000] O.J. No. 4133 (S.C.J.); Toovey v. Milne (1819), 2 B. & Ald. 683, 106 E.R. 514; Triax Resource Ltd. Partnership v. Research Capital Corp., [1999] O.J. No. 1920, 96 O.T.C. 290, 88 A.C.W.S. (3d) 767 (S.C.J.); Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 85 O.R. (3d) 254, [2007] O.J. No. 1083, 2007 ONCA 205, 222 O.A.C. 102, 29 B.L.R. (4th) 312, 56 R.P.R. (4th) 163, 156 A.C.W.S. (3d) 95; Venture Capital USA Inc. v. Yorkton Securities Inc. (2005), 2005 CanLII 15708 (ON CA), 75 O.R. (3d) 325, [2005] O.J. No. 1885, 197 O.A.C. 264, 4 B.L.R. (4th) 324, 139 A.C.W.S. (3d) 4 (C.A.) [Leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 334]

Statutes referred to

Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 [as am.]

Personal Property Security Act, R.S.O. 1990, c. P.10 [as am.]

Authorities referred to

Bridge, Michael G., et al., "Formalism, Functionalism, and Understanding the Law of Secured Transactions" (1999), 44 McGill L.J. 567

APPEAL from the judgment of Fregeau J., [2012] O.J. No. 4461, 2012 ONSC 5077 (S.C.J.) ordering the receiver to pay moneys to the ministry. [page229]

Richard W. Schwartz, for appellant.

Ronald E. Carr and Eric Wagner, for respondent.

The judgment of the court was delivered by

FELDMAN J.A.: —

Introduction

[1] The issue in this case is whether grant moneys that were advanced by the respondent, Ontario's Minister of Training Colleges and Universities (the "ministry"), to a First Nations limited partnership in Northern Ontario, but not spent before the partnership sought to dissolve and appoint an interim receiver, were subject to a "Quistclose trust"[^1] for the benefit of the ministry. The application judge held that they were trust moneys and that the receiver should therefore pay the moneys to the ministry. The receiver appeals. For the reasons that follow, I agree with the receiver that the moneys are not subject to a Quistclose trust and are therefore available to be distributed in the receivership.

Facts

[2] Two Feathers Forest Products was a limited partnership consisting of three First Nations limited partners and a general partner. It was formed in 2007 to develop and operate two plants, a planer mill and manufacturing plant in Dryden, Ontario and a saw mill in Red Lake, Ontario. In 2010, Two Feathers applied to the Northern Training Partnership Fund, recently established by the respondent ministry to support project-based skills training for Northern Ontario residents, for a grant to provide skills training for Aboriginal and non-Aboriginal residents of Northern Ontario in its two proposed plants.

[3] The application was accepted and a detailed written agreement for the advance of the funds was executed, effective February 14, 2011 (the "funding agreement"). In September 2011, after the ministry had advanced a total of $1,895,870 under the funding agreement in three installments, one in March, one in May and one in July, two of the limited partners applied to dissolve Two Feathers. The appellant was appointed interim receiver and manager in October 2011.

[4] The appellant traced the funds that had been advanced by the ministry and found that $1,580,000 was paid to the third [page230] limited partner, Wabigoon Lake Forest Products LP ("WLFP"). From those funds, $563,911.25 had been used to purchase a planer mill. The balance was intended to be used to lease premises for the mill but was still in the hands of WLFP. Ultimately, those moneys were returned to the appellant pending the disposition of this court application.

[5] The application judge found that the ministry had satisfied the onus to prove that the original grant funds were impressed with a trust, known as a Quistclose trust, in the hands of Two Feathers and the funds were therefore now being held by the interim receiver for the benefit of the ministry.

[6] To make that finding, the application judge examined the provisions of the funding agreement in detail. The funds were to be used only for the purpose of carrying out the project. The project is defined in art. 1.2 of the funding agreement to mean the undertaking as set out in Schedule "A".[^2] In addition to a [page231] requirement that it implement on-the-job training, the project is defined in the funding agreement with reference to Two Feathers' proposal to the ministry (the "proposal"). The proposal describes a specialized lumber manufacturing and export business where skills training would take place. It sets out specified amounts of proposed funding in three categories. The request was for $160,920 and $288,080 for on-the-job and classroom training, respectively. The larger portion of the funding, $3,026,000, was designated for "[o]ther", which it further describes as "[c]lassroom and equipment lease".[^3]

[7] The funding agreement restricted Two Feathers to using the funds only in accordance with that agreement. Two Feathers had to segregate any funds not immediately required into an interest-bearing account, and the amount of any interest earned would be deducted from any further funds advanced under the funding agreement. The ministry was not obliged to advance the funds unless it was satisfied with the progress of the project. It could also terminate the funding agreement on 30 days' notice and demand return of any unused funds still in the possession or under the control of Two Feathers. Similarly, if the ministry considered that Two Feathers breached the agreement, it could demand repayment of any remaining funds. Likewise, on the expiry of the funding agreement, Two Feathers was required to return any unused funds. In respect of the repayment or return of funds already advanced, art. 17 provides that moneys owing to the ministry by Two Feathers "shall be deemed to be a debt due and owing to" the ministry. [page232]

[8] The application judge concluded, based on his review of the entire funding agreement, that the funds advanced and not yet spent by Two Feathers were held subject to a Quistclose trust for the benefit of the ministry and must be returned to the ministry by the interim receiver. He based his conclusion on the following findings: (1) There was no intention that Two Feathers would be able to freely dispose of the advanced funds; rather, the funds were to be used only for the specific purpose of carrying out the project. To that end, the ministry had the ability and the mechanisms to ensure that the funds were used only for that purpose and to have the funds returned if they were not being so used. (2) The three certainties of a trust, certainty of intention, certainty of subject-matter and certainty of object, had been established on a balance of probabilities. The object of the trust was the on-the-job skills training to be provided in the project.

Analysis

A. History of the Quistclose trust

[9] The genesis of the concept of the "Quistclose trust" was the House of Lords' decision in Barclays Bank Ltd. v. Quistclose Investments Ltd., supra. In that case, the trust arose in the following way: Rolls Razor was a client of Barclays Bank that was in financial difficulties and had exceeded its allowed overdraft at the bank by a significant margin. In order to try to recover financially, Rolls Razor found a lender who agreed to lend it ú1 million but on the condition that Rolls Razor obtain funds from another source to pay its shareholders the dividend of ú209,719 8s. 6d, which it had already declared and which was to be paid within a short time. Quistclose became that source, agreeing to lend Rolls Razor the sum necessary to pay the dividend, on the condition that the funds would be used only for that purpose and that they would be held in a special account, newly opened for that purpose, until the dividend was paid.

[10] One of the directors of Rolls Razor then made an oral agreement with its bank manager at Barclays, confirmed by the letter that Rolls Razor later sent to the bank with Quistclose's cheque. They agreed that the cheque was to be deposited into a special account and was to be used only to pay the declared dividend. Unfortunately, the company was unable to raise the further funds it needed to remain in business, and decided to voluntarily liquidate. Contrary to the agreement that the Quistclose loan would only be used to pay the shareholders' dividend, the bank then set off the balance in the special account against part of the debit balance owed to it. [page233]

[11] Quistclose sued the bank for return of the funds. Lord Wilberforce explained that in order for Quistclose to be able to claim the funds from the bank, it had to meet two requirements. First, it had to establish that the funds were impressed with a trust in its favour if the funds were not used to pay the dividend, and second, that "[the bank] had such notice of the trust or of the circumstances giving rise to it as to make the trust binding upon them" (at p. 579 A.C.).

[12] Lord Wilberforce had no trouble finding that the mutual intention of Rolls Razor, the borrower, and Quistclose, the lender, was that the funds were to be used only to pay the declared dividend and were not to form part of the assets of Rolls Razor. He concluded that a necessary consequence of their mutual intention was that if the dividend could not be paid, then the funds were to be returned to Quistclose. He stated that it had long been recognized that this type of arrangement created a fiduciary obligation to hold the funds in trust [at p. 580 A.C.]:

That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.

[13] He referred to five historical cases, at pp. 580-81 A.C., all of which involved moneys loaned for the purpose of paying a specific group of the borrower's creditors in order to stave off bankruptcy: Toovey v. Milne (1819), 2 B. & Ald. 683, 106 E.R. 514; Edwards v. Glyn (1859), 2 E. and E. 29; In re Rogers, Ex parte Holland and Hannen (1891), 8 Morr. B.C. 243; In re Drucker (No.1), [1902] 2 K.B. 237 (C.A.); [and] In re Hooley, Ex parte Trustee, [1915] H.B.R. 181.

[14] Turning to the notice issue, Lord Wilberforce was satisfied that the bank had notice that the moneys were provided by a third person as a loan, and were to be used only to pay the dividend. This information was sufficient to constitute notice of the trust. Therefore, the bank could not claim the money for its own benefit: at p. 582 A.C.

[15] The Quistclose trust concept was originally drawn by Lord Wilberforce with narrowly defined parameters in the Barclays Bank decision. In particular, the fiduciary relationship arose where money was lent in emergent circumstances to allow a debtor to pay a certain creditor or group of its creditors in order to keep the debtor in business. If the funds could not be used for that purpose, then the funds were returned to the lender. Those parameters were, however, significantly broadened some 30 years later, when the House of Lords found a Quistclose trust [page234] arose in Twinsectra Ltd. v. Yardley, [2002] 2 A.C. 164, [2002] UKHL 12 (H.L.).

[16] In that case, Twinsectra agreed to lend ú1 million to Y for the purpose of purchasing property, but on three conditions: (1) that Y's solicitor undertake to hold the funds until they were used by Y to purchase property; (2) that Y's solicitor undertake that the funds would only be used for that purpose; and (3) that Y's solicitor would guarantee repayment of the loan. When Y's solicitor would not give the guarantee, Y found another solicitor who agreed to give the undertakings and the guarantee. However, that solicitor essentially ignored his undertaking and paid the money over to Y's solicitor who allowed Y to use the money freely and not to purchase property. The loan was not repaid and the solicitor who gave the guarantee went bankrupt. In the action against Y's solicitor, one of the issues was whether Y's solicitor could be held responsible as a party to a breach of trust. As a threshold matter, therefore, the House of Lords first had to determine whether the circumstances of the loan gave rise to a Quistclose trust.

[17] Both Lord Hoffmann and Lord Millett wrote on the issue. Lord Hoffmann stated that the trust and its terms were found in the undertaking contained in the first two conditions of the loan. Y was not free to dispose of the money as he wished but only to purchase property. The effect of the undertaking was that the money remained Twinsectra's until it was used to buy property. Therefore, the solicitor who held the money held it in trust for the lender, Twinsectra, subject to a power to apply it as a loan to Y in accordance with the terms of the undertaking. Whether the subject funds were "at the free disposal" of the recipient is one of the essential identifying elements of a Quistclose trust.

[18] Lord Hoffmann addressed the two problems that the trial judge believed prevented him from finding a Quistclose trust in the circumstances. The first was that the terms of the undertaking were too vague -- no particular property was identified. Dealing with this point, Lord Hoffmann agreed that the undertaking was an unusual one: Twinsectra was not seeking any security over the property to be purchased, so that there was nothing to prevent Y from subsequently mortgaging the property and using the money for whatever he wished. Lord Hoffmann's response was that as long as a court could say whether the money was used for the described purpose, then the purpose was not too vague and not void for uncertainty.

[19] The second objection was that Twinsectra did not intend to create a trust based on the undertakings because its security [page235] was the solicitor's guarantee. To that, Lord Hoffmann responded that the lender's intention was irrelevant [at para. 17]:

Whether a trust was created and what were its terms must depend upon the construction of the undertaking.

[20] Lord Millett's main focus was to properly characterize the operation of the Quistclose trust under trust principles by conducting an analysis of the locus of the legal and beneficial interest in the trust property.[^4] He concluded that the moneys are always held on a resulting trust for the lender who never parts with the entire beneficial interest in them and that it is the lender who is the person who can enforce the trust. He rejected the theory that anyone but the lender can enforce the trust, including the persons who are the primary objects of the trust, such as a subgroup of the borrower's creditors. In the context of that analysis, he addressed the question whether a Quistclose trust's primary purpose must be to benefit a subset of identified creditors as in the Barclays Bank case itself. He rejected that premise, referring to cases where his characterization of the purpose of the loan was not to benefit a group of people but to purchase equipment or to enable a bank to meet a run and where only the lender could oversee its enforcement. He concluded that, as in the Twinsectra circumstances, a Quistclose trust "must be able to accommodate gifts and loans for an abstract purpose" (at para. 89).

[21] Lord Millett also reviewed the three certainties required for a trust: certainty of intention, of subject-matter and of objects, at paras. 71, 101. On the issue of the significance of certainty of the objects of the trust, Lord Millett agreed with Lord Hoffmann, pointing out as well that if the objects were not sufficiently certain, the result in law is that the moneys revert back to the lender under a resulting trust -- the same result as when the purpose cannot be carried out (para. 101).

[22] One could conclude that after Twinsectra, any time moneys are advanced on an undertaking to use the moneys only [page236] for a stated purpose, which can be an abstract purpose, then regardless of the subjective intention of the person providing the funds and of the nature of the purpose, there is a resulting trust for the lender. This represents a significant expansion of the Quistclose trust, which had been narrowly described in the Barclays Bank case.

[23] As I have concluded that the requirements for a Quistclose trust have not been met in this case, I do not need to decide to what extent that expansion should be adopted in Ontario. However, when that decision does have to be made, the court will have to consider a number of commercial consequences, one of the most significant of which is the potential effect on the creditors of the borrower (or grantee) of the subject funds. For example, as in this case, where funds are advanced to a business with no registration under the Personal Property Security Act, R.S.O. 1990, c. P.10, creditors will have no notice, and in many cases no knowledge, that they are dealing with a debtor whose money is subject to a trust and not available to general creditors.[^5]

B. Was there a Quistclose trust in this case?

[24] The House of Lords authorities are clear that on the issue of the intention to create a trust, it is not the subjective intention of the lender (here the granter) but the intention of the two parties, discerned from the terms of the loan (here the grant). As Lord Millett put it [Twinsectra, at para. 71]:

A settlor must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them.

[25] The application judge came to the factual conclusion -- based on all of the terms of the funding agreement that had the effect of (a) limiting Two Feathers' use of the funds, and (b) providing that the unused funds be returned to the ministry -- that Two Feathers did not receive the funds for its free disposal but only for the purpose of carrying out the project. He then followed with the legal conclusion that [at para. 107], "[v]iewed objectively, I am satisfied that the parties intended to enter into a trust arrangement." [page237]

[26] However, a close examination of the terms of the funding agreement shows that the parties did not intend that Two Feathers would hold the funds in trust for the ministry. In particular, the funding agreement specifically provides that any unused funds constitute a debt owing to the ministry, not trust funds, and that Two Feathers had significant freedom to use the majority of the funds. As a result, in my view, the application judge erred in law in finding that the funds were held on a Quistclose trust.

[27] First, the funding agreement specifically identifies the nature of the relationship between the parties respecting the funds while they are in the hands of Two Feathers but not yet expended -- the critical time -- as one not of trust, but of debtor/creditor. Article 17.1 provides that any moneys under the funding agreement that the recipient, Two Feathers, owes to the ministry "shall be deemed to be a debt due and owing to the Ministry by the Recipient".

[28] If the grant moneys that Two Feathers has not yet spent constitute a debt that Two Feathers owes to the ministry, they cannot be held by Two Feathers on trust for the ministry. While the courts in a number of the Quistclose trust cases state that it is not necessary for the parties to use the word "trust" when creating their agreement, no court has said that when the parties have explicitly characterized their legal relationship in one way, the court will override their agreement and characterize it another way.

[29] To be clear, there was an argument made in Barclays Bank that because the transaction between Quistclose and Rolls Razor was one of loan creating the legal obligation of debt, that excluded the implication of a trust, enforceable in equity. The House of Lords rejected that argument. The loan only arose once the funds were used for the designated purpose -- until that time, the funds were held by the borrower on trust for the lender, and did not become the property of the borrower [Barclays Bank, supra, at p. 581 A.C.]:

There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose . . . : when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt.

[30] In this case, the transaction is one of grant, not loan. However, before the funds are actually expended for the purposes of the grant, or if they are left over and not needed for the agreed purposes, the parties agreed that they constituted, not a trust, but a debt owed by Two Feathers to the ministry. To be a debt, the property in the funds belongs to the debtor, i.e., to Two [page238] Feathers, unlike a trust where only the legal title is held by the trustee, with the beneficial title in the trust beneficiary.

[31] The application judge stated that [at para. 102]

[t]he fact that the word "trust" does not appear in the agreement, and that Article 17 of the agreement stipulates that moneys owing to [the ministry] by Two Feathers "shall be deemed to be a debt due and owing to . . ." [the ministry] is not, in my opinion, determinative of the intention of the parties as to whether the funds were to be at the free disposal of Two Feathers once advanced by [the ministry].

[32] I agree with the application judge that agreeing that moneys owed back to the ministry are deemed to be a debt does not determine whether they are at the free disposal of Two Feathers. However, the effect of this characterization of the granted funds that have to be returned to the ministry if they are not spent or needed for the project is that until Two Feathers pays those funds back, it holds them as a debt due to the ministry, not in trust for the ministry. To override the express agreement of the parties, that any funds owed back to the ministry under the agreement constitute a debt and for the court instead to imply a trust, would be contrary to the "cardinal rule" of interpreting written commercial contracts that the parties "have intended what they said": Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 85 O.R. (3d) 254, [2007] O.J. No. 1083, 2007 ONCA 205, at para. 24; Venture Capital USA Inc. v. Yorkton Securities Inc. (2005), 2005 CanLII 15708 (ON CA), 75 O.R. (3d) 325, [2005] O.J. No. 1885 (C.A.), at para. 26, leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 334.

[33] The second error is the application judge's conclusion that the funds were not at the free disposal of Two Feathers, and it arises from an examination of Schedule "B" to the funding agreement. Schedule "B" is the budget that governs the actual spending requirement for the grant funds. It covers the three fiscal years of the term of the agreement, 2010-2011, 2011-2012 and 2012-2013. As discussed above, of the sum of $3,535,000, the total maximum amount to be granted, only $449,000, was to be spent on on-the-job and in-class training costs, while the vast majority of the funds, $3,026,000, are designated only as "other" in Schedule "B". In the proposal, the "other" funds were described as being for "[c]lassroom and equipment lease".

[34] Since specific funds are designated in Schedule "B" for the actual costs of training, which was the purpose of the grant from the ministry, the vast majority of the "other" funds appear to be available over the term of the funding agreement to set up the business more generally, including lease and equipment costs for the whole business. [page239]

[35] As a result, although the funding agreement requires that Two Feathers spend the grant money on the project, in fact, the budget in Schedule "B" gives Two Feathers significant discretion to spend the largest part of those moneys. Contrary to the conclusion reached by the application judge, those moneys were essentially "at the free disposal" of Two Feathers.

[36] Finally, the circumstances of the grant transaction in this case do not have many of the characteristics that caused a trust to be found in either of the two seminal cases. It was not a situation where the limited partnership needed immediate funding to stave off bankruptcy; the funds were not needed to make a specific payment, whether to a group of creditors or to make a specific purchase; instead, they were obtained as a basic source of business funding for a long-term project.

[37] Nor were the funds advanced based on a short or quickly drawn contractual arrangement; instead, they were the subject of a detailed government-approved funding agreement, fully executed by both parties that prescribed all aspects of the funding relationship between them. It is difficult to see the basis for implying a trust where a sophisticated party, such as a provincial ministry, provides funding by means of a commercial agreement in which its contractual rights and remedies are carefully and extensively defined.

[38] This court has not yet applied the Quistclose trust concept.[^6] However, the British Columbia Court of Appeal in [page240] Cliffs Over Maple Bay Investments Ltd. (Re), [2011] B.C.J. No. 677, 2011 BCCA 180, 17 B.C.L.R. (5th) 60 recently reversed a decision of a motion judge that had implied a Quistclose trust in circumstances where funds were loaned to be used for a general, long-term purpose, as in this case. There, funds were advanced by a debtor-in-possession lender in the context of a Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 order "[t]o facilitate further construction of [a] golf course and development of [a series of] home lots and source an irrigation solution for the golf course": at para. 56. In rejecting the implication of a Quistclose trust for a number of reasons, the British Columbia Court of Appeal stated [at para. 69]:

In short, although it is obvious that Cliffs agreed as a matter of contract that the funds would be used for the general purpose stated, I disagree that this restriction gives rise to any inference of an intention on the part of both parties . . . to create the specialized vehicle that is a Quistclose trust[.]

[39] To summarize my analysis, the ministry entered into a detailed funding agreement with Two Feathers setting out the terms under which the ministry granted funding for Two Feathers to provide on-the-job skills training to residents of Northern Ontario. Although the funds provided were intended to be used only for the purpose described in the funding agreement, there is no basis to infer a mutual intention that the funds were to be held on trust for the ministry. To the contrary, under the budget attached to the funding agreement, the recipient, Two Feathers, had significant discretion to spend the majority of the funds as long as it was for the general purpose stated, as in the Cliffs Over Maple Bay case. And, most importantly, art. 17 of the funding agreement defines the relationship between the parties with respect to any funds that have to be returned to the ministry under the agreement as a debt, not a trust.

Conclusion

[40] In my view, the application judge erred in law in concluding that in these circumstances, the court could imply a Quistclose trust. I would therefore allow the appeal, set aside the order of the application judge and dismiss the application with costs, fixed at $15,000, inclusive of disbursements and HST.

Appeal allowed.

Notes

[^1]: Barclays Bank Ltd. v. Quistclose Investments Ltd., [1970] A.C. 567, [1968] 3 All E.R. 651 (H.L.).

[^2]: Schedule "A" is comprised of the following "Project Description":

Background. The purpose of the Project is to provide support to project-based skills training to help Aboriginal and non-Aboriginal Northern Ontarians participate in and benefit from emerging economic development opportunities. The Province of Ontario announced this new initiative under the project of "Jobs and Growth in Northern Ontario".

Objective. The objective of this initiative is to help Aboriginal and non-Aboriginal Northern Ontarians

[A]ttain workplace skills and sustain employment in the resource related sectors of mining, energy and greener economy, forestry, environment, bio-economy, tourism and agriculture by providing employers in Northern Ontario with skilled workers for current and future needs.

Develop innovative collaborations and models of delivery that are tailored to specific circumstances and needs of the community.

[E]nhance and add value to resources, programs and services already available in the community.

The Recipient shall carry out the Project in accordance with the Proposal.

The Ministry shall provide up to 75% of the overall eligible costs of approved projects. Project partners will provide a minimum of 25% of the overall funding of approved projects. The Ministry funding shall not exceed $15,000 per participant for each year of the Project.

On-the-Job Component. The Recipient shall ensure that the Project has an on-the-job component, including as part of a pre-apprenticeship type program must comply with all applicable legislation and regulations. The on-the-job component of a pre-apprenticeship type, must be trade-appropriate and based on the current Apprenticeship Training Standard or Schedule of Training.

The Recipient shall ensure participants and employers comply with all applicable legislation and regulations as well as the current Apprenticeship Training Standard or Schedule of Training.

The Recipient shall ensure where projects delivering the Level 1 Apprenticeship In-School Curriculum Standard are an approved Apprenticeship Training Delivery Agent for the trade including delivery format and for that location. Participants who successfully complete all of the requirements of Level 1 will be given credit for this level of training.

Apprenticeship Training Delivery Agents are required to issue participants who successfully complete Level 1 will be provided the same documentation given to registered apprentices (e.g. transcript). Project participants must meet the same requirements as registered apprentices to pass level 1.

In compulsory or restricted trades, Level 1 must be taught by a journeyperson with a current Certification of Qualification in that trade.

Performance Targets. The Recipient shall meet [a series of] performance targets . . .

[^3]: The details of the proposal are in Schedule "F" of the funding agreement.

[^4]: Lord Millett embarked on his analysis to resolve the question of which party could enforce performance of a Quistclose trust: at paras. 77-100. This issue is significant because non-charitable purpose trusts may be invalid at common law if there is no party with standing to enforce performance of the trustee's obligations ? since an abstract purpose cannot come to court. The Alberta Court of Queen's Bench invalidated a similar trust on this basis in Ernst & Young Inc. v. Central Guaranty Trust Co., [2004] A.J. No. 600, 2004 ABQB 389, 29 Alta. L.R. (4th) 269 (Q.B.), though the decision was reversed on appeal on other grounds: [2006] A.J. No. 1413, 2006 ABCA 337, leave to appeal to S.C.C. refused [2007] S.C.C.A. No. 9.

[^5]: See, also, concerns raised in: Michael G. Bridge et al., "Formalism, Functionalism, and Understanding the Law of Secured Transactions" (1999), 44 McGill L.J. 567, at pp. 610-14 ("Security and Trust").

[^6]: A number of Ontario trial level decisions have implied Quistclose trusts. These may be divided into four categories. First, two decisions accepted the Quistclose trust principle, but refused to apply it in the circumstances: Del Grande v. McLeery, [1998] O.J. No. 2896, 24 E.T.R. (2d) 30 (Gen. Div.), affd 2000 CanLII 10425 (ON CA), [2000] O.J. No. 61, 31 E.T.R. (2d) 50 (C.A.); Niedner Ltd. v. Lloyds Bank of Canada (1990), 1990 CanLII 6936 (ON SC), 74 O.R. (2d) 574, [1990] O.J. No. 1346 (H.C.J.). Second, two decisions are consistent with the long line of authority cited in Barclays Bank in which a trust was implied with respect to a payment for a specific debt: Ling v. Chinavision Canada Corp. (1992), 1992 CanLII 7497 (ON SC), 10 O.R. (3d) 79, [1992] O.J. No. 1438 (Gen. Div.); Continental Bank of Canada v. Boekamp Manufacturing Inc., [1990] O.J. No. 1043 (H.C.J.). Third, a series of decisions implied a Quistclose trust, but with some ambiguity as to how much the case turned on the Quistclose trust analysis: Cummings Estate v. Peopledge HR Services Inc., [2013] O.J. No. 2296, 2013 ONSC 2781 (S.C.J.); Teperman v. Teperman, [2000] O.J. No. 4133 (S.C.J.); Triax Resource Ltd. Partnership v. Research Capital Corp., [1999] O.J. No. 1920, 96 O.T.C. 290 (S.C.J.); Smith v. Gold Key Construction Ltd., [1993] O.J. No. 157 (Gen. Div.); Abulyha v. Montemurro, [1984] O.J. No. 962 (H.C.J.). Finally, two decisions prior to Twinsectra extended the Quistclose trust concept beyond a payment to discharge a specified debt: Ontario (Securities Commission) v. Consortium Construction Inc., [1993] O.J. No. 1408, 1 C.C.L.S. 117 (Gen. Div.); Gignac, Sutts v. National Bank of Canada, 1987 CanLII 1200 (ON SC), [1987] O.J. No. 298, 5 C.B.R. (4th) 44 (H.C.J.).

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