Legal Blog

Trust Setoff (2)

Posted on June 6, 2017 | Posted in Construction

In our September 2016 newsletter, we discussed Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., a 2016 decision of the Ontario Court of Appeal. In that case, the motions judge refused to allow a general to set off its claim against a sub relating to project #2 as a defence to the sub’s claim on project #1. He did so based on two rationales.

Rationale #1: when a sub claims against a general, relating to project #1, by way of an ordinary claim on contract, and not by way of a trust claim under the Construction Lien Act, then the general cannot claim setoff by way of section 12 of the Act on monies that the sub allegedly owes to the general on project #2.

Rationale #2: when a general does not segregate the monies due to the sub in a separate trust account and therefore breaches the Act’s trust provisions, the general cannot rely on section 12 of those trust provisions.

The Court of Appeal did not decide whether the motions judge was correct regarding rationale #1, but agreed that rationale #2 was fatal to the general’s claim for setoff. We now have another case dealing with rationale #1: 1587855 Ontario Inc. v. Contract Glaziers Corp., a 2016 decision of the Ontario Superior Court of Justice.

Clever

Picture the same scenario as in Architectural Millwork, but with a twist. The general had obviously read the Architectural reasons for decision and informed the sub that it retained the monies due on project #1 “in a segregated interest-bearing bank account established for that sole purpose and not co-mingled with other (of the general’s) operating funds.” In doing so, the general sought to comply with the Act’s trust provisions and remove rationale #2 as a bar to its reliance on section 12 as a defence to the sub’s claim on contract relating to project #1.

The sub brought a motion for summary judgment for the amount due of $166,000 relying on rationale #1.

Disposition

Section 12 of the Act states: “… a trustee may, without being in breach of trust, retain from trust funds an amount that, as between the trustee and the person the trustee is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee’s favour of all outstanding debts, claims or damages, whether or not related to the improvement.”

The motions judge disagreed with rationale #1. He stated that it was irrelevant whether the sub relied on the trust provisions to govern whether the general could rely on the section 12 trust setoff provision; that provision is inserted for the benefit of the general, regardless whether the sub advances a claim under the Act. He also held that it was irrelevant that the monies were not originally segregated; they became segregated and were identified as separate funds in a separate account.

The judge granted judgment for the full amount due, but held that the judgment could not be enforced until the action relating to project #2, which included a claim by the general against the sub in excess of the monies due on project #1, was ultimately resolved. The judge also ordered that the general could not use the monies held in the segregated bank account for any other purpose until the action regarding project #2 was resolved.

Strategy

For a short while, it seemed that there could be a benefit to a sub claiming against the general only in contract, while omitting any claim under the trust provisions of the Act. Now that rationale #1 has not been followed, we can no longer see any benefit to the prosecution of a claim on contract only. There should always be a claim under the trust provisions of the Act.

 

Image courtesy of southernfried.

Jonathan Speigel

 

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.

 

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