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Why do plaintiffs’ lawyers join as a defendant anyone who might have any potential liability to the plaintiff, rather than focussing only on the obvious defendants? That question has an easy answer. Lawyers do not know, at the time that they commence the action, whether, if the plaintiff is successful, it will be able to collect the money owed under the judgment from a particular defendant. The more defendants who are found liable, the greater the chance of collecting the judgment. The task of the plaintiff’s lawyer is to collect money for the plaintiff, not to obtain a piece of paper to hang as an adornment on the recreation room wall.

However, just because you join them, does not mean you will be successful against them. An example is set out in 1150402 Ontario Inc. v. Delfino, a 2002 decision of the Superior Court of Justice.

 Lie & Cheat

Delfino and Carvalho had a good idea: their corporations would work on masonry projects jointly through a new corporation (“Newco”). Each would be paid the labour and materials that were contributed to the project and the profit would be shared equally. Delfino then had a great idea. Let Carvalho work his part of the project and then take all of the money from Newco. 

Delfino did this in at least two ways. The best way was to ensure that the money never made it into Newco’s bank account. The second best way was to forge a $30,000 cheque removing the money from Newco’s bank account and deposit it into the bank account of his daughter’s corporation (“Susyco”).

Delfino claimed that Susyco had done work on the project and even had a Susyco invoice to prove it. Unfortunately, he had nothing else to prove what work Susyco had allegedly done, like, for example, wage payment slips or material invoices.

It did not take the judge long to determine that Delfino was a fraud artist. Accordingly, the judge held Delfino and his corporation (“Delfinoco”) liable for $64,000. The judge held that Susyco was a party to the fraud and liable to repay the $30,000. The judge dismissed the action against Delfino’s daughter because the evidence showed that the daughter signed what her father told her to sign, knew nothing about the money, and knew nothing about the operations of Susyco. Accordingly, she did not participate in the fraud.

The judge was sufficiently upset with Delfino that he also awarded $15,000 for punitive damages against Delfino, Delfinoco, and Susyco.

We have no doubt that the judge will also order the triumvirate to pay substantial indemnity costs to the plaintiff. Accordingly, even after the plaintiff credits the $30,000 that it was able to secure from Susyco, there will still be a large amount of money owing to the plaintiff.

General 

The plaintiff’s lawyer, adhering to the time honoured tradition that we discussed above, also joined in the action the general in one of the projects on which Newco worked.

The plaintiff alleged that the general knew that Newco was the masonry sub and, accordingly, had no right to pay the proceeds of the masonry subcontract to Delfinoco. The plaintiff claimed that the subcontract was really with Newco. However, the purchase order was to Delfinoco and the general’s tender to the owner named Delfinoco as the masonry subcontractor. The judge relied on the written evidence to find that the subcontract was between the general and Delfinoco.

Trust 

The plaintiff then argued that the general breached the trust provisions under the Construction Lien Act by paying Delfinoco when Delfinoco had not yet paid its subcontractor, Newco.

The judge had to decide whether section 8 of the Act, which defines the basic trust, provides for a trust for all subs and subsubs down the line or just the subs with whom the general contracts. We would have thought that the answer was self-evident and, indeed, have been advising our clients of this answer for years.

The judge noted that if a general had to hold money in trust for subsubs, money would never be paid down the line. The general would never know exactly who its subs had paid and would forever be liable to an indeterminate number of subsubs and suppliers working on the project. The judge also noted that section 10 of the Act expressly allows a payment to a subsub. It states: “Every payment by a trustee to a person the trustee is liable to pay for services or materials supplied to the improvement discharges the trust of the trustee making the payment and the trustee’s obligations and liability as trustee to all beneficiaries of the trust to the extent of the payment made by the trustee.” What relevance would section 10 have if a payment from a general to a sub could be construed as a breach of trust?

The judge stated that “beneficiaries are limited to persons who stand in direct privity (of contract) with the contractor and who are owed money by the contractor.” Accordingly, the plaintiff, as a subsub, was not a beneficiary of the money that the general held in trust. Only Delfinoco could claim that there was a breach of that trust and there could be a breach of that trust only if the general owed money to Delfinoco. The judge dismissed the plaintiff’s action against the general and, we expect, will order the plaintiff to pay the general its costs of the action.

Question 

The judge was very clear. Subs and subsubs do not have the right to claim a breach of trust two rungs up the ladder. Accordingly, what happens when a subsub alleges that the general has breached its trust against a sub? The sub, for whatever reason, probably because it has gone out of business or because it has not paid its subsub, does not want to prosecute a trust claim against the general. If the sub is judgment proof, how does the subsub get at the money it alleges that the general holds in trust for the sub?

The subsub could be limited to obtaining a judgment against the sub and then garnishing the general for the monies that the subsub alleges the general owes to the sub. The general would refuse to pay and the subsub and the general would then join battle on that issue.

However, if the subsub was correct and the general had owed money to the sub, what happens if the general cannot pay. Had there been a breach of trust, the subsub could have looked to the directors and officers of the general for personal liability. This remedy may no longer be available because, technically, the complaining party was not a beneficiary under the trust. Construction law is never simple.