Lawyers' Liability for Construction Trusts - Case Comment on Electro Works v. Fogler, Rubinoff LLP

  • October 28, 2021
  • Dan Fridmar

The trust provisions under the Construction Act (the “Act”) provide for obligations and rights for contractors/subcontractors additional to those established by common law. In the past few years, the law surrounding trusts under the Act has evolved to expand said obligations onto owners, financers, and even assignees of monies that were properly for the benefit of contractor/subcontractor beneficiaries.

Recently, the Court in the case of Electro-Works Ltd. v. Fogler, Rubinoff LLP (“Electro-Works”)[1] further expanded this scope to include monies received through settlement funds and applied as payment for lawyers’ fees. In many ways, the Electro-Works case serves as a cautionary tale to all lawyers in the construction bar.

Background

There were five main actors in the Electro-Works case:

  • R & B Properties (Queen Street) Inc. (“R&B”), who was the owner of the subject property/project;
  • Glenn Steven Abugov (“Abugov”), who was the director and officer of R&B;
  • I.C.I. Construction Corporation (“I.C.I”) who was the general contractor for the subject project;
  • Electro-Works Ltd. (“EWL”) who was a subcontractor of I.C.I. for the subject project; and
  • Fogler, Rubinoff LLP (“Fogler, Rubinoff”), who acted as counsel for I.C.I. in a lien claim against R&B as well as in a breach of trust claim commenced by EWL against I.C.I., the quantum of which was disputed by I.C.I.[2]

Throughout the course of the aforementioned actions, I.C.I. settled its claim against R&B for payment in the sum of $406,712.74 by R&B to I.C.I. (the “Settlement Funds”). At the time of this settlement, I.C.I. was still disputing EWL’s claim in EWL’s breach of trust action (the “Trust Action”).[3] As such, on or about October 8, 2014, Fogler, Rubinoff received the Settlement Funds into its lawyer-trust-account, which it subsequently distributed pursuant to I.C.I.’s payment directions. Fogler, Rubinoff then transferred the sum of $39,812.68 from the Settlement Funds held in its trust account to its general account for legal services performed for I.C.I. (the “Payment”). Shortly thereafter, Fogler, Rubinoff was removed off record as I.C.I. counsel in EWL’s trust action.[4]

In or around July 2015, EWL and I.C.I. reached a settlement based on a payment plan. This settlement provided a clause allowing for EWL to obtain a consent judgment as against I.C.I. and Abugov in the event that these parties failed to make payments in accordance with said payment plan. Shortly thereafter, I.C.I. defaulted on the settlement, resulting in EWL obtaining a Judgment as against I.C.I. and Abugov in the sum of $72,000.00 plus $5,000.00 in costs (the “Judgment”).[5] To EWL’s misfortune, I.C.I. declared bankruptcy and Abugov could not be located to satisfy the Judgment.

Application against Fogler, Rubinoff

In an attempt to collect on the Judgment, EWL brought the within Application arguing that the Settlement Funds received by Fogler, Rubinoff were impressed with a trust immediately upon receipt of same. EWL argued that these monies could only be used for the purposes of the trust, namely to pay subcontractors, such as EWL. In justifying its argument, EWL argued that Fogler, Rubinoff was liable as a constructive trustee under the trust created by section 8 of the Act (the “Section 8 Trust”)[6] as “a party in ‘knowing receipt’ of trust funds belonging to another.”[7]

“Knowing Receipt” is a common law doctrine, which looks to the principal of construction knowledge (whereby knowledge of circumstances that would indicate the facts to an honest person, or knowledge of fact that would put an honest person on inquiry).[8] Accordingly, EWL submitted that, while Fogler, Rubinoff may have been a stranger to the obligations under the Section 8 Trust, Fogler, Rubinoff had sufficient knowledge to be put on notice of the possibility of a breach of trust.[9]

Thus, as Fogler, Rubinoff should have known that the Settlement Funds were subject to a trust in favour of EWL, and as it subsequently applied a portion of the Settlement Funds as the Payment for its own use and benefit, EWL argued that Fogler, Rubinoff was in breach of the Section 8 Trust.

Fogler, Rubinoff responded to this Application by stating that the knowing receipt doctrine did not apply in the present case. It argued that Section 8 Trust was a statutory, not common law, trust and that the Act explicitly identified the individuals who could be deemed to have breached such a trust. Namely, section 13 of the Act limits liability to owners, contractors, subcontractors, and individuals who had effective control of them.[10]

Decision of the Honourable Madam Justice Papageorgiou (the “Application Judge”)

Ultimately, the Application Judge held that Fogler, Rubinoff was indeed in breach of the Section 8 Trust and that it had an obligation to pay to EWL the sum of the Payment received by Fogler, Rubinoff from the Settlement Funds.[11]

In arriving at Her Decision, the Application Judge considered the nature and purpose of the Section 8 Trust. As recently outlined by the Court of Appeal in the recent Tremblar and King Road Paving cases, the general policy concerning the Section 8 Trust is to provide additional obligations and expand on protections provided to subcontractors, rather than decrease them.[12]

The Application Judge further established that: (1) the counsel with carriage of I.C.I.’s file was a certified specialist in construction law with thirty years’ experience; (2) Section 8 makes clear that the trust is imparted over monies until all subcontractors are paid all amounts owed to them; and (3) Fogler, Rubinoff admitted that I.C.I. received the Settlement Funds as payments on account of the subject project.

Accordingly, the Application Judge held that there was sufficient evidence that Fogler, Rubinoff had knowing receipt that the Settlement Funds were imparted with the Section 8 Trust and that the Payment was a breach of said trust.

Take-Away for the Legal Community and the Construction Bar

At the Application, Fogler, Rubinoff submitted that extending liability for breaching a Section 8 Trust onto a lawyer/law-firm would create a chilling effect onto the legal community. Hereafter, lawyers would be put in a difficult position in deciding whether to follow their clients’ instructions to release settlement funds and could thereby violate their duty of loyalty to their clients.[13]

To this point, Her Honour held that the concern was unwarranted, given that – in receiving the Payment – Fogler, Rubinoff wore two hats: one as counsel for I.C.I. in EWL’s trust action and the other as a creditor of I.C.I. receiving payment for an unsecured claim (its legal fees). As a subcontractor’s trust claim has priority over a lawyer’s unsecured claim for legal fees, Her Honour held that there was no violation of public policy.[14]

Moving forward, lawyers practicing in the construction bar should consider the following lessons taken from the Electro-Works case, namely:

  • Identify from the outset whether your client has any trust obligations that remain unpaid to subcontractors or materials suppliers (especially in the age of prompt payment);
  • As recommended by the Application Judge, where a client instructs you to release monies that may be imparted with a trust – obtained by settlement or otherwise, advise the clients that these monies should be held until the trust dispute is resolved; and
  • As a general principal, avoid receiving payment from settlement funds unless you have a solicitor’s lien.[15]

The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact me at dan@fridmar.com.

 

[1] Electro-Works Ltd. v. Fogler, Rubinoff LLP, 2021 ONSC 626 [Electro-Works].

[2] Ibid at para. 4.

[3] Ibid at para. 5.

[4] Ibid at paras. 6-8.

[5] Ibid at paras. 9-11.

[6] Construction Act, R.S.O. 1990, c. C.30, s. 8.

[7] Electro-Works, supra note 1 at para. 13.

[8] Hurt v. Armstrong & Quaile Associates Inc. (2007), 2007 CarswellOnt 3731, at para. 61. (Sup. Ct.).

[9] Electro-Works, supra note 1 at paras. 15-18.

[10] Ibid at paras. 20-23.

[11] Ibid at paras. 3, 41 & 42.

[12] Ibid at para. 21.

[13] Ibid at para. 36.

[14] Ibid at paras. 37-39.

[15] In paragraph 39 of Electro-Works, the Application Judge alludes to the fact that, in the event of insolvency, a solicitor’s lien may have some preference or other priority over a construction trust.

Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.