Legal Blog

Assignment

Pursuant to section 73 of the Construction Act, lien rights may be assigned to another (an “assignee”). One would think that the rights of that assignee, received by virtue of the assignment, would be identical regardless of who the assignee is. Well, “it ain’t necessarily so.” The decision in Great Northern Installation Services Ltd. v. King Road Paving and Landscaping Inc., a 2019 decision of the Ontario Divisional Court, is a case in point.

Box Score

We have an owner, a general, the general’s lawyers, and two subs (SC1 and SC2).

After trial, and before any allocation of costs of the trial, the trial judge held that the following amounts, which we have rounded liberally, were due:

• The owner owed the general $79,000 after being credited for $106,000 already paid to the general.
• The owner had holdback obligations to the subs of $97,000 ($18,000 by way of the basic holdback and $79,000 by way of the holdback arising from a written notice of lien).
• SC1 had a lien for $52,000 and SC2 had a lien for $54,000. Remember, there is no lien for interest.
• Since the aggregate of the liens of the two subs was more than the owner’s holdback, the subs had to share the holdback money pro rata: $48,000 to SC1 and $49,000 to SC2.
• The general owed SC1 $104,000, comprised of $52,000 for actual goods and services plus contractual interest (not lienable, but still due from the general) of $52,000. The interest amount was extraordinarily high because the general and SC1 had agreed upon interest at 2% per month, which was the equivalent of approximately 26% per year based on the compounding factor.

To make matters more interesting:

• Before the trial, the general had received an assignment of SC2’s lien rights pursuant to section 73 of the Act. Presumably, the general had paid a percentage of SC2’s lien to reduce the general’s risks at trial. Presumably, SC2 accepted less than the claimed amount so that it could be paid immediately rather than go through a trial.
• The general was not getting enough money from the owner to pay the subs in full. Accordingly, its lawyers were getting anxious and obtained a charging order against the money due to the general from the owner. A charging order is awarded to lawyers when, through their efforts, their client is to receive money from a lawsuit. Instead of being paid to the client, the money is paid to the lawyers for their fees.
• The only money the general was to receive came from the money due to the general as an assignee of SC2’s lien. It was to receive nothing from the owner because the owner’s actual liability to the general was less than what the owner was paying in holdback to the two subs.

Priority

So, after trial, what was the issue? The lawyers wanted the $49,000 that was being paid to SC2 for its lien plus another $5,000 for interest on that holdback that was due from the owner to the general – for a total of $54,000. This money would otherwise have gone to the general, but was subject to the lawyers’ charging order. SC1 wanted the $54,000 because, even after the owner had paid it $48,000 towards its lien, the general owed it an additional $55,000. The priority decision involved an analysis of the trust fund sections of the Act and the categorisation of the money that the general had received from the owner.

Trust Fund

Section 8(1) states that all money a general receives on account of the contract price constitutes a trust fund for the benefit of the subs. Section 8(2) states that the general, as trustee, cannot appropriate any part of the fund for its own benefit until all of the subs have been paid. Section 11(1) states that a trustee (i.e. the general) who pays subs from money that is not subject to a trust may retain an equivalent amount from the trust fund without being in breach of trust.

The Court noted that, if the general had received the assignment of the lien by way of a payment from its own money, then, no doubt, the general would have had priority, to the extent of that payment, from the $54,000 in dispute. However, there was no evidence of this and, accordingly, the Court held that all of the money that the general paid for the assignment came from the money that the owner had previously paid to the general as part of the contract price. The court therefore held that all of the disputed $54,000 was trust money to be applied to all trust claims, including SC1’s claim.

The lawyers argued that if this interpretation were applied, a general would never take an assignment of a sub’s lien rights – because the general would not then reap the benefit of the lien and would be forced to pay any amount awarded to it to another sub. The Court rejected this “in terrororem” argument for three reasons:

• A general with the means to pay its debts would be unaffected by the application of trust principles. Solvent generals will settle with a sub and take a lien assignment for the reasons any party might settle a claim.
• A general may settle a claim for non-litigation considerations (e.g. continuing an ongoing supply relationship).
• The argument does not address the effect of s. 11, under which a settling general is entitled to retain settlement funds paid with non-trust funds.

When faced with the further argument from the lawyers that it was only through their efforts that the funds were available for distribution to anyone, the Court was unimpressed. It noted that, in many cases, little or nothing would be left to a general after the subs were paid and, accordingly, a general’s lawyers needed to make appropriate arrangements with their clients for payment.

Upshot

After the court noted that interest on trust funds were also trust funds, the Court awarded SC1 all of the $54,000 (almost all of the $55,000 still owed to it) and the lawyers’ nothing.

The Court made no decision regarding the costs that had been awarded to SC1 against the general because the decision would have been irrelevant; the amount claimed plus interest already exhausted the available trust funds.

Comments

We have reservations regarding the Court’s interpretation of section 8(1). The $54,000, which the Court said were trust funds, were not received “on account of the contract … price;” rather, they were received as a result of SC2’s claim, although indirectly from the owner as part of its duties under the Act.

However, assuming the Court is right and we are wrong, what should an impecunious general do if it wants to continue the fight against the owner, recognising that the subs will take all of the money? Further, what should its lawyers do if the general is unable to pay them – notwithstanding the Court’s cavalier assumption that the lawyers can get their retainer up front. What if the general cannot afford to pay them?

Well, we certainly know that the general should not use its cash to buy one of the claims for lien. That stratagem did not go well for the general or its lawyers. We suggest that if it makes economic sense, because of a discount, to buy and take an assignment of a claim for lien, the assignee should not be the general; it should be the general’s principal or his or her spouse or another corporation that the principal controls. If this had been done in Great Northern, the Court would have had far more difficulty to find that the proceeds earmarked for SC2 were trust funds in the general’s hands.

 

Image courtesy of  MichaelGaida.

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