Legal Blog

One Rung

No. We are not talking about a bell. We are referring to rungs of a construction ladder. The Construction Lien Act trust provisions are set up to ensure that a beneficiary of a trust, one rung down the ladder, has a right of action against the trustee, with whom that beneficiary contracted, one rung up the ladder. That has not stopped subcontractors, two rungs down the ladder, from taking a run at an owner or subsubs from taking a run at a general. One such run was taken in Robert Nicholson Construction Co. v. Edgecon Construction Inc., a 2016 decision of the Ontario Divisional Court.

Unusual

An owner owed its general $1.3 million. For reasons of its own, the general directed the owner to pay those funds to a corporation associated with the general who had acted as a construction manager for the project. A sub, whom the general had failed to pay $141,000, was not pleased to learn of the “misdirected” revenue.

For purposes of the general’s trust liability to its unpaid subs, it mattered not that the general directed the owner to pay money to its associated corporation. The general would still be deemed to have received that money and would still be deemed to have held that money in trust for its subs. However, this did not satisfy the sub, who, after obtaining default judgment against the general, was unable to collect the judgment debt.

In desperation, the sub commenced an action against the owner alleging that the owner breached its statutory trust obligations.

As an aside, a contractor does not usually direct its accounts receivable to be paid to someone else. However, we have been involved in a number of situations in which subs, who are in financial difficulty, direct the general to pay monies otherwise due to the sub to selected subsubs, including suppliers. As long as they receive an appropriate direction to pay subsubs, generals could care less to whom they actually pay the money.

Trust Provision

In this case, section 7 of the Act, which deals with an owner’s trust duties to its general, applied. Section 8 of the Act applies to a trust whose trustee is a general or a sub. In each section, it is apparent that the trust is for the person with whom the trustee has contracted (i.e. one rung down the construction ladder).

Notwithstanding section 7, the motions judge held that a sub could be a beneficiary of the trust in which the owner is the trustee. He held that the owner breached that trust when it paid someone other than the general (i.e. the associated corporation) and it breached the trust even if the associated corporation properly used the money to pay project’s subcontractors. The effect of that decision was that the owner, who complied with the direction from the general to pay $1.3 million to an associated corporation, was then held liable to the sub for an additional $140,000 and, indeed, could have been liable to other unpaid subs for the full $1.3 million.

Not surprisingly, the owner appealed the decision to the Divisional Court.

Reversal 

Interestingly, the sub conceded before the Divisional Court that the motions judge erred in law when he found that a sub could be the beneficiary of an owner’s trust. The Court fully agreed.

However, the sub then argued that there was another basis for which the owner could be liable to the sub: section 13 of the Act. That section is used to attach personal liability to a director, officer, or person in effective control of a corporate trustee, or its relevant activities, when that corporate trustee breaches its trust duties under the Act. The person being held liable under this section must first have assented to or acquiesced in conduct that the person reasonably ought to have known amounted to a breach of trust.

The sub argued that the owner had effective control over the general, or at least one of its relevant activities, because it held the purse strings and, by paying the associated corporation rather than the general, it assented to the general’s breach of trust.

The Court gave short shrift to this argument. It noted that there was no suggestion that the owner knew of the sub’s claim or knowingly participated in a scheme to defeat that claim. It refused to create liability merely because an owner paid money to a third party upon the direction of a general. The Court also noted that it would be an absurd reading of the Act to find that someone who merely has a duty to pay money to a corporation has control over one of the relevant activities of that corporation.

The Court set aside the judgment and dismissed the sub’s action with an award of $15,000 in costs.

Image courtesy of ttronslien.

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