Legal Blog

Assent

In order to hold a director or officer liable for a corporation’s breach of trust, the beneficiary of the trust must prove, under section 13(1) of the Construction Lien Act, that the director “assents to, or acquiesces in, conduct that he or she knows or ought reasonably to know amounts to a breach of trust by the corporation.” This is relatively easy to do at a trial -assuming that there was assent. Can it be done by way of a motion for summary judgment? That question was answered in both West Carlton Concrete Corp. v. Smavila Forming Ltd. and Varcon Construction Co. v. 1554098 Ontario Inc., 2011 decisions of the Ontario Superior Court of Justice.

West Carlton

A concrete supplier alleged that a forming sub owed it $66,000 for concrete that the sub required for, and that the supplier delivered to, a number of construction sites. The reasons for decision were silent on the point, but we assume that the supplier was able to prove that the sub was paid for its work on the projects and did not pay the supplier in breach of its trust.

Corporate Liability

 The sub originally claimed that the supplier had delivered the wrong concrete or made deliveries too late. However, by the time of the motion, the sub merely alleged that none of its representatives had signed delivery slips for invoices totalling to $31,000 and that, therefore, the sub did not owe the supplier for the alleged concrete delivery.

 The judge was not impressed. He first queried why the sub had not paid the undisputed invoices of $35,000. He then relied on the supplier’s evidence, which demonstrated that it maintained a sophisticated and detailed delivery tracking and billing system. The sub put forward no evidence to contradict the supplier’s evidence. The judge held that the supplier had raised an evidentiary onus that required the sub to provide positive evidence to demonstrate clearly that the supplier never delivered the concrete to the sub’s projects. You may feel that it is impossible to prove a negative. Not so, the concrete for the project had to come from somewhere. If the concrete had not come from the supplier, the sub could have easily adduced evidence indicating who had supplied it.

 Accordingly, the judge granted judgment against the sub for the full amount claimed.

 Personal

 The judge then turned his sights to the sub’s two directors. One did not dispute that he knew of the non-payment of the sub. However, he deposed that the other was not involved. Accordingly, the other director argued that there ought not to be summary judgment against her and that, at the very least, there ought to be a trial of the issue.

 The rules regarding summary judgment have changed over the past couple of years. Motions judges may now take a hard look at the facts and even assess credibility when determining whether there is a genuine issue for trial.

 Although the other director alleged that she knew nothing of the problem, the supplier was able to prove that the other director was also a signing officer for cheques. The judge then analysed the matter as follows:

 “At this point the (supplier) had raised an evidentiary onus that required the (other director) to provide additional proof that despite signing cheques on behalf of the (sub), her duties were such that she did not acquiesce in conduct that she knew or reasonably ought to have known constituted a breach of trust by the corporation. I think that it is fair to presume that the person signing cheques on behalf of a corporation has some knowledge of its workings and issues such as disputes over non-payment of invoices. By not placing any additional evidence demonstrating that her authority to sign cheques did not involve her being sufficiently acquainted with the operations of (the sub) she has risked losing ‘by not putting her best foot forward’.”

 Given this analysis, the judgeheld both directors personally liable.

 Costs

 The judge ordered the sub and the directors to pay costs of $11,500 including HST and disbursements. This was relatively close to the solicitor-client costs that the supplier had incurred. The judge’s award before costs had exceeded an offer to settle that the supplier had delivered before the motion and, consequently, the judge increased the costs that he otherwise would have fixed.

 Varcon

 The facts were complicated, involving two contracts and a prior settlement. However, the essence of the dispute arose from a tenant not paying its contractor for work that the contractor had performed on tenant’s improvements at two locations. Instead of going through the time and cost of discoveries and a full trial, the contractor brought a motion for summary judgment.

 Corporate Liability

 The judge held that the tenant had received funds from the landlord to finance the improvements and had not paid the contractor. Accordingly, the contractor proved that it was the beneficiary of a trust. The onus then shifted to the tenant to prove that it had complied with its obligations, as trustee of the money received from the landlord, by establishing that it applied all of those monies to pay only the trust beneficiaries for the projects.

 The tenant adduced no evidence to support its position that the leasehold improvements cost more than the landlord had paid. It did not list the expenditures, the money it paid, or to whom it paid the money. Simply put, it did not put its best foot forward and, consequently, was held liable for a breach of trust.

 Personal

 It seems that the sub had only one director. This, we would have thought, should have been enough to impose liability on that director. If the sole director does not know what is going on, who does? However, the Ontario Court of Appeal has stated otherwise (see newsletter of September 2007); the trust beneficiary must still prove assent or acquiescence.

 In this case, the contractor adduced evidence of the director’s involvement. He negotiated and signed the contracts with the contractor; he negotiated and signed the first settlement proposal; and he was the tenant’s president. The judge found that he had to have approved the payments on the projects and therefore knew of and assented to the breach of trust.

 Accordingly, the judge held the director personally liable for the tenant’s trust breach.

 Moral

 When there is an obvious breach of trust and there are smoking guns regarding the control of individual directors and officers, the contractor should do some homework and then move for summary judgment. In the right case, a disappointed trust beneficiary may not have to incur the delay of, and expenses relating to, a trial.