Breach of Trust in Construction - A Powerful Remedy
In the construction industry, unique legal remedies are available to contractors and subcontractors under the provisions of the Construction Lien Act (the “Act”). The most well known remedy is the construction lien. It would be difficult to find a builder, developer, contractor, sub-trade or material supplier who is not aware of lien rights. The same cannot be said for the lesser known remedy afforded under the Act – breach of trust.
The provisions concerning breach of trust can be found in Part II of the Act and all builders, developers, contractors, sub-contractors, trades and suppliers to the construction industry should be aware of them. Conduct that is off-side of the provisions of Part II can lead to personal liability for a corporation’s officers and directors, and anyone who has effective control of the corporation’s activities.
The breach of trust provisions apply to a construction project so long as the work supplied to the project was originally lienable. However, the breach of trust remedy is not otherwise tied to lien rights and the rigid timelines that the lien regime is known for do not apply.
There is no requirement that a lien be in place for the breach of trust provisions to apply. In fact, an action can be maintained for breach of trust regardless of whether lien rights have expired. It is a stand alone remedy and is actually prohibited from forming part of a lien action.
Part II of the Act
Part II provides that owners, contractors and subcontractors who receive money on a project must first pay those who supplied services and materials to the project. The failure to do so amounts to breach of trust, which can create personal liability.
In other words, before any funds received are used to pay overhead and operating expenses, construction suppliers must first be paid. The best practice is to maintain a separate trust account in order to segregate trust funds. The courts have held that the failure to segregate trust funds into a separate account constitutes a prima facie breach of trust. Even the Act does not expressly set out that it is mandatory to have a separate trust account.
Section 7 deals with the owner’s trust and provides as follows:
7. (1) All amounts received by an owner, other than the Crown or a municipality, that are to be used in the financing of the improvement, including any amount that is to be used in the payment of the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and prior encumbrances, a trust fund for the benefit of the contractor.
The obligations of an owner as trustee are found in section 7(4):
(4) The owner is the trustee of the trust fund created by subsection (1), (2) or (3), and the owner shall not appropriate or convert any part of a fund to the owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to the contractor by the owner.
Section 8 deals with the contractor and subcontractor’s trust and provides as follows:
8. (1) All amounts,
(a) owing to a contractor or subcontractor, whether or not due or payable; or
(b) received by a contractor or subcontractor, on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor.
The obligations of the contractor and subcontractor as trustee are found in section 8(2):
(2) The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor.
The serious implications for breach of trust, and the ability to pierce the corporate veil, can be found in section 13 of the Act:
Liability for breach of trust
13. (1) In addition to the persons who are otherwise liable in an action for breach of trust under this Part, (a) every director or officer of a corporation; and (b) any person, including an employee or agent of the corporation, who has effective control of a corporation or its relevant activities, who assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust.
Effective control of corporation
(2) The question of whether a person has effective control of a corporation or its relevant activities is one of fact and in determining this the court may disregard the form of any transaction and the separate corporate existence of any participant.
Those in the construction industry are well-advised to review and understand the breach of trust remedy. They should also maintain a separate trust account, segregated from the general account, for receiving monies on account of a construction project and distributing to suppliers lower on the construction ladder – or be faced with having to respond to a breach of trust claim brought against the individual personally, as well as the corporation.