Legal Blog

Two Rungs

With apologies to Albert Einstein, to whom this saying is attributed: the definition of insanity is doing the same thing over and over again and expecting a different result. Subs who make a claim against an owner, two rungs up on the construction ladder, for breach of trust under the Construction Act (or the old Construction Lien Act, which is unchanged in this regard) fall into that definition. Such was the case in Tremblar Building Supplies Ltd. v. 1839563 Ontario Limited, a 2020 decision of the Ontario Divisional Court.

Nothing New

Sub complained that general had not paid it $30,000 for work that it performed on the owner’s project. Sub could have, but did not, register a claim for lien. General was declared bankrupt. Sub could have pursued its claim through the bankruptcy proceedings. However, because it probably saw nothing would be available in the bankruptcy, sub instead sued the owner – alleging a breach of trust under the Act and unjust enrichment. After a motion judge, by way of a summary judgment, dismissed the action, sub appealed to the Divisional Court.

Trust

The Court pointed out that the Act is remedial legislation that provides additional obligations and rights to those the common law provides. However, these rights and obligations do not imply the existence of further rights and obligations that do not arise under either contract law or the Act.

Without the Act, sub would be restricted to its rights in contract law. Since it never entered into a contract with the owner, it would have no direct recourse against the owner. It would have to sue general and, if it successfully obtained a judgment, it might have some recourse against owner under the law of debtor/creditor or, after bankruptcy, under the Bankruptcy and Insolvency Act.

The Act creates additional rights and obligations, including the construction lien and the construction trust. However, the Act not only creates the construction trust; it limits it. The trust runs with contractual obligations, but only regarding money received or receivable from a trustee. A general holds money in trust for a sub (s. 8 of the Act); an owner holds money in trust for a general (s. 7 of the Act). An owner, who does not contract with a sub, does not hold money in trust for a sub; a sub is two rungs down on the construction ladder.

This concept is not new. The courts have confirmed it repeatedly over the last 20 years.

Unjust Enrichment

When all else fails, try unjust enrichment. It is like slinging dung against the wall – sometimes it may stick; usually it does not.

In order to establish unjust enrichment, a claimant must demonstrate three things: an enrichment of the defendant, at the expense of the claimant, without a juristic reason (i.e., no reason in law or justice for the defendant’s retention of the enrichment).

The problem with this claim lies in the Act. As the Divisional Court stated, when noting that a previous judge had gotten it all wrong and that the concept of unjust enrichment is not available under construction claim circumstances:

“In the case at bar, the situation is the precise sort of situation that the Construction Lien Act was designed to address and augmenting the scope of claims available would undercut the balance established by the Act. The comprehensive scheme of rights and obligations under the Construction Lien Act is the juristic reason for precluding claims for unjust enrichment by subcontractors against owners.”

Result

If not readily apparent from our previous discussion, the Divisional Court dismissed the appeal with $10,000 in costs against sub.

We would have thought that the claims for breach of trust (with no privity of contract) and for unjust enrichment in the alternative have now been laid to rest. However, we had thought that many times before and yet claimants, who have failed to register a claim for lien, keep grasping at straws.

Image courtesy of TheDigitalWay.

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