Legal Blog

Tale of Two Decisions

Today we get to discuss two decisions: one very good, the other very bad.

Cheat

In All About Construction Ltd. v. 1336555 Ontario Ltd. et al, a 2001 decision of the Ontario Superior Court of Justice, we have a classic case of a “bad guy” and a bad decision.

The facts were initially unremarkable: a corporate developer was developing a project; the developer ran out of money; and the construction manager, an architect, and various contractors filed liens. The facts became interesting when a management corporation and the girlfriend of the sole shareholder, officer, and director of the corporate developer also filed liens. Further, the amount of these two liens exceeded the aggregate of all of the other liens.

Someone other than the controlling shareholder of the developer was the purported owner of the management corporation. Her relationship with the controlling shareholder was never explained. The purpose of the management corporation was allegedly to supply secretarial, bookkeeping, management, and design services to the project. The developer was to have paid the management corporation $200,000 for its work.

There were some aspects of the claim of the management corporation that made it suspect. The controlling shareholder, who fought every other lien, supported the claim of the management corporation. There was evidence that the agreement between the management corporation and the developer might have been backdated. The consideration in the agreement bore no relationship to the work that the management corporation was to do. The management corporation claimed a lien for the full amount when, according to its purported owner, only 50% of the work had been done. Further, as far as the judge was concerned, the management corporation had done nothing for the project, other than signing the agreement, issuing an invoice for the full amount, and registering the lien.

The judge held that the entire agreement was a sham. He held that the controlling shareholder of the developer was also the controlling mind of the management corporation and had, in essence, set up a charade to attempt to obtain priority in the sale of the developer’s lands.

The judge also made short shrift of the girlfriend’s lien. She lived with the controlling shareholder and admitted that her project duties started only after the construction had stopped. There was obviously no right to claim a lien.

Although the judge made no mention of it, almost all of the alleged duties of the management corporation and the girlfriend were overhead. There is no right to lien for these services, even if they were legitimate.

Stop

If the judge had stopped there and awarded judgment against the developer alone, the decision would have made sense. Unfortunately, he went further.

First, he awarded interest at the rates set out in the various lien claimants’ invoices. He did not discuss the legal cases that state that invoices are irrelevant to establish interest; only a contract can do so (see newsletters of May 1999 and June 2000). There was no evidence that the developer had ever agreed to the interest charged in the invoices.

Second, he held that the controlling shareholder was personally liable. To support this conclusion, he made but two statements. He said that “the corporations are owned and controlled by” the controlling shareholder. So what! He then moved from that momentous finding of fact to the conclusion that the developer included the controlling shareholder. This is boot strapping at its worst. The judge made no findings of fact that the lien claimants ever thought they were dealing with the controlling shareholder personally or that the controlling shareholder had done anything improper resulting in the failure of the development.

This decision was made solely because the judge was angry at the controlling shareholder and his “poor attempt … to obtain a priority at the expense of the other creditors holding security.” That is an improper basis on which to found personal liability. If the judge was upset by the conduct of the controlling shareholder, the judge’s recourse was to impose on the controlling shareholder, as the judge had already done, the payment of the solicitor and client costs of the lien claimants, not by concocting personal liability where none existed.

In Contrast

In Central Supply Company (1972) Limited v. Modern Tile Supply Company Limited et al, a 2001 decision of the Ontario Court of Appeal, we have a decision that recognises reality and limits the imposition of personal liability, at least so that it does not necessarily get imposed for anything that a fertile legal mind can devise.

The defendant corporation was a small retail store that supplied floor and wall coverings both to the public and contractors. The store suffered financial reversals and the owners, who had kept it afloat by drawing no salary for over a year, ultimately closed it down.

The plaintiff was a material supplier. The store had owed it money when the store had closed. The supplier sued both the corporation and its individual owners. It claimed that the owners were liable under the trust fund sections of the Construction Lien Act.

There were problems with the claim of the supplier. The non-legal problem was that the plight of the individual owners aroused some sympathy. The legal problem was that the supplier’s product was not earmarked for a particular construction site. The supplier provided the product to be sold in general with all of the other products re-sold by the store.

The Court of Appeal noted that the trust fund sections had been incorporated into the Act to protect suppliers who supply product to a particular improvement, just as the lien sections give protection by way of the registration of a claim for lien. Although the lien and trust sections are different, they work in concert with each other; if there is no right to lien, there is no right to claim as a trust beneficiary.

The Court stated that the Act was never intended to apply to suppliers who sell to retail stores without any known or identifiable improvement. There is no right to a lien and there is no right to claim as a trust beneficiary. Accordingly, the corporation store breached no trusts by failing to pay the supplier and the individual owners therefore did not participate in a breach of a trust for which they could be held liable.

Differences

In the first case, we have an individual attempting to pervert the course of justice, being caught, and being punished. In the second case, we have hard-working individuals whose venture failed but who, aside from possible mismanagement, did nothing wrong and shouldered much of the financial fallout themselves. Although we might look at the results and decide that they are appropriate for the facts, the results were wrong in law in the first case and right in the second case.