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Knowledge

In order to claim a statutory trust, must a supplier have knowledge of the improvement into which its goods are being incorporated? More particularly, must the supplier intend that its goods benefit a particular project and must the supplier eventually be able to prove the exact project to which its goods were supplied? These questions were answered in Sunview Doors v. Academy Doors, a 2010 decision of the Ontario Court of Appeal.

Darkness

The supplier delivered custom doors to a contractor who then used them in a number of its construction projects. When the supplier requested payment, the contractor’s representative told the supplier that it was awaiting payment on its projects to which the doors were supplied. The supplier requested information as to these projects, but the rep refused to supply the information. Of course, the contractor never paid anything to the supplier.

Two months before the contractor went out of business, the rep incorporated a new corporation and opened a business very similar to the contractor’s business.

The owners of the projects, whoever they were, paid the contractor for its work, but the contractor did not pay the supplier.

History

The trial judge was not happy with the contractor’s witnesses. They asserted that they could not provide records of the projects because the dog ate their homework. Sorry, wrong facts; it was because the landlord locked them out of their premises. The trial judge did not believe them. The landlord testified to the contrary and, at minimum, the contractor had, but refused to produce, accounting ledgers that set out invoices and payments for each project.

However, the trial judge felt that he was bound by a previous decision of the Divisional Court (an intermediate Ontario appellate court) in Central Supply v. Modern Tile. In that case, Court of Appeal judges, who were sitting as a panel of the Divisional Court, decided:

1.   They would synchronise their interpretation of the lien sections and trust sections of the Construction Lien Act. Since a lien claimant must be able to show the particular improvement to which its goods were supplied, so must a trust claimant.

2.   “A supplier must intend that the material sold be used for the purposes of a known and identified improvement before a lien or trust arises.”

Relying on this statement of the law, the trial judge in Sunview tore a strip off the contractor, but felt constrained to dismiss the supplier’s trust action. The supplier never intended that its doors be delivered to a known and identified improvement and, even at trial, could not demonstrate to which projects its doors went.

The supplier appealed the decision to the Divisional Court. The Court reversed the decision. It distinguished Central on its facts. In Central, a supplier had delivered its products to Modern Tile, a retail store, who then, with no knowledge of the specific project, sold those products to the public; conversely, in Sunview, the contractor was selling custom-made doors for specified projects. However, the Sunview Divisional Court went further. Since the Court in Central was sitting as a panel of the Divisional Court, although comprised solely of Court of Appeal judges, the Sunview Divisional Court technically had the same jurisdiction as the Court in Central. Accordingly, the Sunview Divisional Court stated that it disagreed with, and would not be bound by, the statement in Central that the supplier must intend that the material be used for a specified improvement.

In effect, the Divisional Court was thumbing its nose at a panel of the Court of Appeal. What’s worse, Justice Abella, now a judge of the Supreme Court of Canada, wrote the decision in Central.

Given the unusual situation, when the contractor appealed the Sunview decision to the Court of Appeal, the Court appointed a five-person panel, not the usual three-person panel, to hear the appeal.

Central Tile

The Court correctly pointed out that the panel in Central could have made its decision on the simple grounds that Modern Tile was not a contractor or subcontractor. It was not a contractor because it was not employed by an owner to supply services. It was not a sub because it was not a person supplying services or materials to an improvement under an agreement with a contractor. It was a mere retailer. Of course, if Modern Tile were not a contractor or sub, then it had no trust duties to its suppliers.

The Court noted that the purpose of the Act is to benefit persons working in the construction and building repair industries. It gives two main remedies to prevent an owner from receiving a benefit to land without paying for it. The first is the lien claim and the second is the trust claim. Each has its own rules and remedies.

The Court analysed the previous jurisprudence, the intent of the Act, and the 1983 statutory changes to conclude that a person could have a trust fund claim and not a lien claim and that, for a trust claim:

1.   A supplier need not intend that its material be incorporated into a known and specific improvement at the time of supply; and

2.   If a contractor receives money for a project and the contractor owes the supplier money, then that is sufficient to link the supply to the improvement.

More

However, the Court went further. In Sunview, the contractor had made it impossible for the supplier to determine where its products were installed. The Court refused to allow the contractor to hide behind its own misdeeds. Allowing this would condone unjust enrichment.

The Court stated:

“The object of the Act is to prevent unjust enrichment of those higher up in the construction pyramid by ensuring that money paid for an improvement flows down to those at the bottom. In seeking to protect persons on the lower rungs from financial hardship and unfair treatment by those above, the Act is clearly remedial in nature. The remedial nature of the Act also supports a liberal construction so as to enable it to serve its purpose. The purpose of s. 8 is to impress money owing to or received by contractors or subcontractors with a statutory trust, a form of security, to ensure payment of suppliers to the construction industry. In this case, Academy’s conduct makes it impossible to link the supply of Sunview’s materials to a particular improvement or Academy’s subcontracts for different projects. Yet, to deny Sunview payment would frustrate the object of the Act and deny it a meaningful remedy. I see no reason why, as a matter of policy, this should be so.”

Upshot

The Court held that the supplier was entitled to the protection of the trust provisions and dismissed the contractor’s appeal. It also dismissed the rep’s appeal. It held that she had an active role in the contractor, was paid between $150,000 and $195,000 in excess of her salary, and was probably just a front in the contractor opening a new business. Accordingly, she had effective control of the contractor and was personally liable for its breach of trust.