In a development with potentially significant implications for the construction and insolvency sectors, the Ontario Superior Court granted an initial order under the Companies' Creditors Arrangement Act ("CCAA") that included a rarely seen measure: a stay on calls against performance bonds. The decision in Re Earth Boring Co. Limited raises important questions about the limits of judicial discretion under section 11 of the CCAA and the role of section 11.04, which addresses the role of third-party guarantors in a debtor's restructuring. This bulletin analyzes the scope and rationale of the Court's order, its alignment with existing legal and commercial principles, and the practical consequences for owners, contractors, and sureties in the construction industry. Is this an isolated outlier tailored to a unique set of facts, or the harbinger of a broader shift in how courts treat suretyship in insolvency proceedings? This bulletin explores the implications for owners, financiers and contractors alike.
Background
Earth Boring Co. Limited ("Earth Boring") is a large trenchless construction service provider in Ontario. Financial challenges forced Earth Boring, together with its two holding companies and a dormant management company (Yarbridge Holdings Inc., Trolan Investments Ltd., and Yarfield Services Limited) (collectively, the "Applicants"), to file a NOI Proceeding under the Bankruptcy and Insolvency Act, which they later continued under the CCAA.1
In their April 17, 2025 application for an initial order under the CCAA, the Applicants sought an unusual "preventative measure" – a stay on all enforcement of, or calling on, performance bonds connected with projects which they intended to complete, except with the written consent of the Applicants and the Monitor.2 Aviva Insurance Company of Canada ("Aviva"), which holds a total of $150 million in bonds over various construction projects in which the Applicants are involved, did not object to the initial order, provided the relief was granted as a "complete package".3 As a result of the stay, owners of Earth Boring's bonded construction projects can no longer exercise their right to seek relief from the surety if Earth Boring fails to perform.
Justice Steele's Reasons
Justice Steele exercised her discretionary powers under section 11 of the CCAA to grant the Applicants' request to stay the owners' rights. In her reasons, issued April 22, 2025, Justice Steele distinguished the performance bond stay from the other "conventional" relief sought by the Applicants.4 Nevertheless, she determined that granting the requested relief would "further the efforts to achieve the remedial purpose of the CCAA" and "avoid the economic and social losses resulting from liquidation of an insolvent company".5
Justice Steele relied on two arguments raised by the Applicants. First, that they needed "breathing room to communicate with project owners and counterparties in order to facilitate the completion of the Continuing EBCL Projects, which is critical for any restructuring of the Applicants and the Business".6 Second, that any call on a performance bond would trigger Aviva's obligation to act, which "could and likely would interfere with the Applicants' ability to operate under the contract in question" and that additional costs that Aviva "might" incur "could and likely would interfere with the further flow of project funds to the Applicant."7
Section 11.04 of the CCAA
While it does not appear that any party raised the potentially relevant restriction before Justice Steele, it is important to note that the court's discretionary powers under section 11 above are subject to section 11.04 of the CCAA:
No order made under section 11.02 has affect on any action, suit or proceeding against a person, other than the company in respect of whom the order is made, who is obligated under a letter of credit or guarantee in relation to the company.
A guarantee is "a promise by one person to answer for the due performance of the obligation of another person (whether imposed by law or contract) in the event that the other person fails to perform that obligation as required".8 Arguably, a performance bond qualifies here.
Some courts have found that section 11.04 does not prohibit stays of guarantees and does not limit the courts' discretionary power under section 11.9 Others have interpreted this section to mean that a stay cannot affect a guarantor.10
The latter approach makes good commercial sense. A performance bond both furnishes the owner of a project (and very often, the lenders to that project) with security for the bonded contractor's promise to perform the work as stipulated by the construction contract, and offers credit protection to the owner and its financiers in the event of an insolvency of the bonded contractor. Generally, if the contractor defaults on its obligations, the owner or lenders can expect to be able to call on the performance bond. The surety will then investigate the default and – if it agrees that default has occurred – it may choose to negotiate a resolution, hire another contractor, pay the owner financial compensation, or reinstate the defaulting contractor.11 As Barclay J stated so many years ago in Browne v. Southern Canada Power Co., "[i]t is a somewhat startling proposition that a surety can avail himself of the bankruptcy of his principal debtor to avoid or modify his own obligation" because surety contracts are generally "for the very purpose of guaranteeing the solvency of the principal debtor".12
Even if section 11.04 is not a complete bar on a stay on guarantee claims such as performance bond calls, courts have agreed that in order to obtain such a stay, an applicant must show that permitting the third-party claims would hinder or complicate the restructuring process underway.13
Certainly a surety could, upon receiving a call on the performance bond, take over the project, thus diverting assets from the debtor contractor. However, this is not the most common outcome. On receiving a call, the bonding company will generally first investigate whether there has actually been a default. If the contractor is continuing to perform on-site, a bonding company will often try to facilitate a resolution rather than take over the project itself. Importantly, the surety can also pay out the owner to the maximum of the bond (often initially set at half the contract price), consistent with an ordinary commercial guarantee. Until the surety's choice is known, there is no imminent risk to the debtor or the restructuring process, and only in certain circumstances would the debtor's assets be adversely affected.
The Evidence Before Justice Steele
Typically, a CCAA debtor only seeks necessary and urgent relief in an initial order. Here, there was no evidence in the application record of an imminent risk to the Applicants.
The Applicants merely stated that any disruption to the bonded projects would "detrimentally impact the ongoing operations and funding of [Earth Boring] to the prejudice of the Applicants and their stakeholders"14 and that "the stay on Performance Bonds is intended to prevent precipitous enforcement steps and to facilitate discussions and proper arrangements with contractual counterparties (if needed) to maintain the going concern nature of the Applicants and their operations."15 Similarly, the Monitor's pre-filing report asserted that "[i]f not stayed, calls on the applicable performance bonds could otherwise cause potential instability and interruption to the Continuing EBC Projects."16
Standing alone, these vague allegations of possible future harm would not ordinarily seem enough to justify exceptional relief under section 11, especially as the Applicants conceded that they were not aware of any default under the performance bonds at the time of the motion.17 Moreover, payouts to an owner under the performance bond would not have hindered the Applicants' ability to maintain operations.
Ramifications of the Stay
Justice Steele's decision to stay performance bond calls may seem to offer short-term breathing room to struggling contractors, but it also disrupts the commercial logic underpinning surety agreements and shifts risk to project owners and their financiers in ways that may seem difficult to justify under the statutory framework. This is because a stay on calls against performance bonds shifts the risk of a contractor's insolvency from the surety, who voluntarily assumed it, to the owner, who paid to avoid it, and thereby places the onus on the owner to show that the stay should be lifted so that the terms of the surety contract may be given effect.
In the context of performance bonds and CCAA proceedings, a balanced and nuanced approach would better reflect commercial realities and respect the parties' freedom of contract. Instead of staying the beneficiaries from calling on the performance bond, courts could stay the surety from enforcing its own rights against a debtor-contractor who is continuing with construction, unless they can establish how the exercise of those rights would forward the objectives of the CCAA. Such an approach would place the burden of proof on the surety instead of the owner, which better reflects the allocation of risk in the surety contract and its nature as a credit protection instrument relied upon by both owners and financiers.
Whether this ruling signals a new judicial willingness to subordinate bargained-for rights in aid of restructuring objectives — or will be confined to its facts — remains to be seen. In the meantime, owners would be well-advised to reassess their bonding arrangements and CCDC contract terms in light of this uncertain terrain. Our team can assist in mitigating these evolving risks and protecting the positions of both owners and lenders on future projects.
Footnotes
1. Notice of Application (CCAA Initial Order), at paras 1(b), 4 & 14.
2. Ibid., at para 1(k); Affidavit of Eugene Woodbridge sworn April 16, 2025 (the "Woodbridge Affidavit"), at paras 180-182.
3. Re Earth Boring Co. Ltd, 2025 ONSC 2422 [Earth Boring], at para 45; Woodbridge Affidavit, at para 99.
4. Earth Boring, at para 3.
5. Earth Boring, at para 41, citing to Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, at para 70.
6. Earth Boring, at paras 40-43.
7. Earth Boring, at para 44.
8. In re Northern Transportation Co., 2016 ABQB 522, at para 69 [Northern Transportation], citing McGuinness, The Law of Guarantee (Toronto: Carswell, 1986).
9. See, e.g., 2675970 Ontario Inc., 2024 ONSC 6174, at paras 28-46 [2675970 Ontario]; In re Charles Morissette inc., 2014 QCCS 385 (declining to extend section 11.04 to a surety agreement); In re Laura's Shoppe (PV) Inc., 2015 QCCS 4716, at paras 50-52 (same) [Laura's Shoppe].
10. In re Northern Transportation Co., 2016 ABQB 522, at paras 76-101; Cannapiece Group Inc. v. Carmela Marzili, 2022 ONSC 6379, at para 34 (applying similar language under section 11.03). See also 7636156 Canada Inc. (Re), 2020 ONCA 681 (drawing a similar conclusion under section 69 of the BIA); Tri-State Signature Homes Ltd (Re), 2017 ABQB 587 (same).
11. Surety Association of Canada, "Performance Bonds", https://suretycanada.com/SAC/SAC/Surety-Bonds/Performance-Bonds.aspx; Harshil Gupta and Alex Benarroche, "Performance Bonds for Construction Explained", May 21, 2025, https://www.procore.com/en-ca/library/construction-performance-bond.
12. Browne v. Southern Canada Power Co., 23 C.B.R. 131, 71 Que. K.B. 136, at para 21.
13. 2675970 Ontario, at para 48; Northern Transportation, at para 101; Laura's Shoppe, at para 4.
14. Woodbridge Affidavit, at paras 181-82.
15. Woodbridge Affidavit, at para 183.
16. Report of BDO Canada Limited as the Proposed CCAA Monitor, dated April 16, 2025, at para 43.
17. Earth Boring, at para 40.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
