Breach of Trust in Ontario Construction Projects and the Timeline to Pay

  • October 28, 2021
  • Ivan Merrow

The trust provisions in the Ontario Construction Act (the “Act”) impose serious obligations to retain and account for funds at every level of the supply chain. The consequences for failing to do so are serious. The trust provisions provide a direct personal cause of action against officers and directors who assent to or acquiesce in conduct they reasonably ought to know amounts to a breach of trust.

In the recent case Clearwater Structures v. 614128 Ontario Ltd. o/a Trisan Construction, 2021 ONSC 5601 (CanLII) (“Clearwater”), the court suggests that in addition to obligations to segregate and hold funds for trust beneficiaries in the Act, there may also be circumstances where there is an implied obligation to pay those trust funds in a timely fashion.

Reviewing Breach of Trust

Funds received by an owner or contractor for a construction improvement in Ontario are generally impressed with a deemed trust. The trust is for the benefit of the contractor(s) owed amounts for services or materials supplied to the project. This is intended to keep funds in the construction supply chain. Personal liability can be imposed on those who knowingly take funds out of the project and leave contractors unpaid.

  • Owner’s trust (s. 7): Amounts received by owners to finance the improvement are considered a trust fund for the contractor(s) with privity to the owner. When amounts are certified as payable by a payment certifier, including unpaid amounts for substantial performance, the scope of funds impressed with a trust is expanded: all amounts “in the owner’s hands or received by the owner at any time thereafter” constitute a trust fund for the benefit of the contractor. The owner’s trust provisions do not apply to the Crown or municipalities.

  • Contractor’s trust (s. 8): All amounts received by a contractor on account of the price for an improvement are considered funds for the benefit of subcontractors and other persons with privity who are owed amounts for the supply of materials to the improvement. A recent amendment to the Act created express record-keeping and banking requirements, including that written records be maintained detailing funds paid into and out of the trust accounts.
     
  • Vendor’s trust (s. 9): Should an owner sell a property, the value of the property less reasonable expenses to discharge mortgage indebtedness also constitutes a trust for the benefit of a contractor. This prevents owners from avoiding trust obligations through the sale of a property.
     
  • Prohibition on use of funds: Until the beneficiaries are paid, the owner’s, vendor’s and contractor’s trusts prohibit trustees from appropriating any part of the trust fund to the trustee’s own use, or using the funds in any manner inconsistent with the trust. This generally means that overhead expenses cannot be paid until after contractors with privity have been paid.
     
  • Personal liability (s. 13): Every director or officer of a corporation, and any person who has effective control of a corporation or its relevant activities, may be personally liable for breach of trust if they assent to or acquiesce in conduct they know or ought to know amounts to a breach of trust. This provides unpaid contractors and subcontractors a remedy against those responsible for removing funds from the construction pyramid in a manner contrary to the Act. It also provides an alternative means of recovery should the trustee become insolvent.
     
  • Set-off (s. 12): Trustees may respond to breach of trust allegations by claiming set off in accordance with section 12 of the Act. Funds may be retained from a trust in an amount equal to all outstanding debts, claims or damages due from the beneficiary to the trustee related to that improvement. In the event of a beneficiary’s insolvency, these set-off amounts may include amounts unrelated to the improvement.
     
  • Procedure: Breach of trust allegations are typically advanced as ordinary non-lien actions under Ontario’s Rules of Civil Procedure. Lien actions are subject to different civil procedural rules and shorter limitations periods. Breach of trust actions and lien actions are advanced simultaneously in parallel but separate proceedings.

The trust provisions of the Act contain express obligations to hold funds and avoid using those funds in a manner inconsistent with the trust. The Clearwater case specifically considers whether there may also be a deemed requirement to pay those trust funds in a timely manner.

The Refusal to Pay in Clearwater

In Clearwater, the subcontractor commenced a breach of trust action against the contractor, 614128 Ontario Ltd. (the "Contractor"), for failing to pay holdback, contract funds, and approved extras. The subcontractor, Clearwater Structures (the “Subcontractor”), commenced both a lien action and an action for breach of trust. The Contractor vacated the lien by posting a bond in the amount of $1,040,911.29. The action proceeded under the old Construction Lien Act, not the post-2018 amendments to the Act that include prompt payment, adjudication, or the additional trust account record-keeping obligations for contractors in section 8.1.

After the lien was registered, the Contractor refused to distribute any further funds to the Subcontractor. The Contractor later admitted that it owed the Subcontractor $534,762.18 pursuant to the subcontract, subject to a set-off claim for $75,424.07. It deposited the entire $534,762.18 into a segregated account as it was obligated to do, however, it did not tell the Subcontractor it had made this deposit. After the Subcontractor liened, the Contractor simply refused to make any further payment.

The Subcontractor made 11 requests for accounting information from the Contractor, including specific requests whether payment of the subcontract proceeds had been received. If the Contractor paid the statutory trust payment, the Subcontractor offered to reduce the amount of its lien by the amount paid. The Contractor refused. Instead, it responded with a request for additional detail about amounts due, but did not respond after further information was provided.

The Breach of Trust Judgment

The Subcontractor brought a summary judgment motion against the Contractor for breach of trust in order to obtain judgment before trial. Rather than proceeding on a purely paper record, the court ordered a mini-trial with a combination of written affidavits and oral evidence.

In response to the motion, the Contractor revealed that it had deposited the funds in a segregated account, argued that the Act had no obligation to pay the funds, and requested that instead of summary judgment that the breach of trust action be consolidated with the lien action.

During closing argument, the Contractor maintained that the Act did not impose any obligation to pay trust funds in a timely manner, only that the trust funds not be used in a manner inconsistent with the Act. In effect, the Contractor argued that it was entitled to keep the funds owed to the Subcontractor segregated in a trust fund until the set-off and lien claims had been adjudicated.

The court acknowledged that there was no express requirement to pay trust funds in the Act, but rejected the Contractor’s argument that this obviated the need to pay trust funds altogether. The court rejected the Contractor’s set-off claim, and found that the Contractor committed a breach of trust by “failing pay the monies to the Plaintiff in a timely fashion and by failing to provide an accounting of trust funds received when requested to do so.” The court went on to state that, “to give any credence to the suggestion that the failure to release trust funds when they become due and owing cannot constitute a breach of trust would serve to completely undermine the purpose and effect of the trust provisions of the Act.”

In finding that the failure to pay in a timely fashion was a breach of trust, the court distinguished the prior case Susin v. Genstar Development Co. In Genstar, the court had previously refused to find a breach of trust for mere failure to pay a trust fund, and the judgment was upheld by the Ontario Court of Appeal. The court distinguished Genstar by stating that there was very little underpinning the bald breach of trust allegation in that case. Clearwater interpreted Genstar as not standing for “the immutable proposition that failure to pay out trust funds received and owing on a sub-contract can never constitute a breach of trust.”

The court went on to consider the personal liability of the Contractor’s key personnel involved in the refusal to pay the Subcontractor. The company president was found to be in knowing receipt of trust funds and instructed his financial controller to not pay the Subcontractor. The failure to pay the Subcontractor the accounting requested multiple times was also found to be the president’s responsibility. The financial controller, too, was held personally liable, for following the president’s instructions not to pay the Subcontractor, despite knowledge the payment was due and owing. These findings embody the most serious consequences available from the application of the Act’s trust provisions.

Key Takeaways 

Several key takeaways can be drawn from the decision:

  1. Reasons for non-payment matter: Several unique factors contributed to an adverse outcome against the Contractor for withholding “received and owing” trust funds, including: the Contractor’s repeated refusal to provide accounting information, the admitted amount owing that was not paid to the Subcontractor, the poorly substantiated set-off claim that amounted to less than 15% of the admitted amount, and the admission that reason the trust funds were withheld was a reaction to the Subcontractor’s enforcement of its lien rights. These factors undermined the Contractor’s ability to put forward a factually and legally supported defence to the breach of trust claim.
     
  2. Set-off claims must be supportable: By distinguishing and contextualizing Genstar, the court acknowledged that breach of trust claims on weaker evidentiary and legal foundations may still justify delayed payment. The court specifically cited the need to pay trust funds that are received and owing. For example, in the case Man-Shield v. Rainy River District School Board, 2012 ONSC 323, the court held that the Act’s trust provisions “do not entitle a contractor to immediate payment of these amounts in circumstances where there is a claim for set off by the trustee” because the “quantum of the trust amount cannot be determined without a determination of the value of the set off claim.” In Clearwater the court was not faced with a fulsome legal challenge to the amounts owed to the Subcontractor: the majority of the amounts were admitted to be owing and the Contractor’s fractional set-off claim was swept aside due to insufficient evidentiary foundation. Set-off claims must be robust to fend off breach of trust claims brought by unpaid contractors and subcontractors.

Clearwater serves as a reminder that the trust provisions of the Act create real obligations that will not be set aside lightly by the courts. To withhold trust funds from beneficiaries, construction stakeholders must have reasonable grounds, and any claim for set-off must be supported by a strong evidentiary foundation.

Despite acknowledging that the Act does not contain a timeline or deadline for trust funds to be paid, and stating that each case must be decided on its own facts, the court in Clearwater refused to accept that there is unlimited discretion to delay payment when funds were known and admitted to be otherwise owing. Contractors and owners alike should consider this case when negotiating with unpaid suppliers and subcontractors, and be mindful of the trust obligations in Ontario's Construction Act.

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