construction trusts

Construction Construction TrustsTrusts

Duncan W. GlaholtDuncan W. Glaholt

Part II - TrustsPart II - Trusts

s. 7 - Owner’s trusts. 7 - Owner’s trust s. 8 – Contractor’s s. 8 – Contractor’s

trusttrust s. 9 – Vendor’s s. 9 – Vendor’s

trusttrust s. 10 – Discharges. 10 – Discharge s. 11 – Reductions. 11 – Reduction s. 12 – Retainages. 12 – Retainage s. 13 - s. 13 -

Part II - TrustsPart II - Trusts s. 7s. 7

7.--(1) All amounts 7.--(1) All amounts receivedreceived by an owner, by an owner, other than the Crown or a municipalityother than the Crown or a municipality, that , that are to be used in the financing of the are to be used in the financing of the improvement, including any amount that is to improvement, including any amount that is to be used in the payment of the purchase price be used in the payment of the purchase price of the land and the payment of prior of the land and the payment of prior encumbrances, encumbrances, constituteconstitute, subject to the , subject to the payment of the purchase price of the land payment of the purchase price of the land and prior encumbrances, and prior encumbrances, a trust fund for the a trust fund for the benefit of the contractorbenefit of the contractor. .

Section 7(2)Section 7(2)

Where amounts become Where amounts become payablepayable under a contract to a contractor by under a contract to a contractor by the owner the owner on a certificate of a on a certificate of a payment certifierpayment certifier, , an amount that is an amount that is equal to an amount so certifiedequal to an amount so certified that that is in the owner's hands or received is in the owner's hands or received by the owner at any time thereafter by the owner at any time thereafter constitutes a trust fund for the constitutes a trust fund for the benefit of the contractorbenefit of the contractor. .


Where the substantial performance of Where the substantial performance of a contract has been certifieda contract has been certified, or has , or has been declared by the court, been declared by the court, an amount an amount that is equal to the unpaid pricethat is equal to the unpaid price of the of the substantially performed portionsubstantially performed portion of the of the contract that is in the owner's hands contract that is in the owner's hands or is received by the owner at any time or is received by the owner at any time thereafter thereafter constitutes a trust fund for constitutes a trust fund for the benefit of the contractorthe benefit of the contractor. .


The owner is the trustee of the trust The owner is the trustee of the trust fund created by subsection (1), (2) fund created by subsection (1), (2) or (3), and the owner or (3), and the owner shall not shall not appropriate or convert any part of a appropriate or convert any part of a fund to the owner's own use or to fund to the owner's own use or to any use inconsistent with the trustany use inconsistent with the trust until the contractor is paid all until the contractor is paid all amounts related to the improvement amounts related to the improvement owed to the contractor by the owner. owed to the contractor by the owner.


8.--(1) 8.--(1) All amountsAll amounts,,(a) (a) owingowing to a contractor or subcontractor, to a contractor or subcontractor, whether or not due or payable; orwhether or not due or payable; or

(b) (b) receivedreceived by a contractor or by a contractor or subcontractor, on account of the contract or subcontractor, on account of the contract or subcontract price of an improvement subcontract price of an improvement constitute a trust fund for the benefit of the constitute a trust fund for the benefit of the subcontractorssubcontractors and other persons who have and other persons who have supplied services or materials to the supplied services or materials to the improvement who are owed amounts by the improvement who are owed amounts by the contractor or subcontractor. contractor or subcontractor.


(2) The contractor or subcontractor is the (2) The contractor or subcontractor is the trustee of the trust fund created by subsection trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall (1) and the contractor or subcontractor shall not appropriate or convert any part of the not appropriate or convert any part of the fund to the contractor's or subcontractor's fund to the contractor's or subcontractor's own use or to any use inconsistent with the own use or to any use inconsistent with the trust until all subcontractors and other trust until all subcontractors and other persons who supply services or materials to persons who supply services or materials to the improvement are paid all amounts related the improvement are paid all amounts related to the improvement owed to them by the to the improvement owed to them by the contractor or subcontractor.contractor or subcontractor.

Section 9(1)Section 9(1) Where the owner's interest in a premises Where the owner's interest in a premises

is sold by the owner, an amount equal to, is sold by the owner, an amount equal to, (a) the (a) the value of the considerationvalue of the consideration received received

by the owner as a result of the sale, by the owner as a result of the sale, lessless, , (b) the (b) the reasonable expenses arising from reasonable expenses arising from

the salethe sale and the amount, if any, paid by and the amount, if any, paid by the vendor to discharge any existing the vendor to discharge any existing mortgage indebtedness on the premises, mortgage indebtedness on the premises, constitutes a trust fund for the benefit of constitutes a trust fund for the benefit of the contractorthe contractor. .


(2) The former owner is the trustee (2) The former owner is the trustee of the trust created by subsection of the trust created by subsection (1), and shall not appropriate or (1), and shall not appropriate or convert any part of the trust convert any part of the trust property to the former owner's own property to the former owner's own use or to any use inconsistent with use or to any use inconsistent with the trust until the contractor is paid the trust until the contractor is paid all amounts owed to the contractor all amounts owed to the contractor that relate to the improvement. that relate to the improvement.

Section 10Section 10

Subject to Part IV (holdbacks)Subject to Part IV (holdbacks), , every every paymentpayment by a trustee by a trustee to a person the to a person the trustee is liable to paytrustee is liable to pay for services or for services or materials supplied to the improvement materials supplied to the improvement discharges the trust of the trustee discharges the trust of the trustee making the paymentmaking the payment and the trustee's and the trustee's obligations and liability as trustee obligations and liability as trustee to all to all beneficiariesbeneficiaries of the trust of the trust to the extent to the extent of the paymentof the payment made by the trustee. made by the trustee.


(1) Subject to Part IV, a trustee (1) Subject to Part IV, a trustee who pays in whole or who pays in whole or in partin part for the supply of services or materials to an for the supply of services or materials to an improvement out of improvement out of money that is not subject to a money that is not subject to a trusttrust under this Part may under this Part may retainretain from trust funds an from trust funds an amount equal to that paid by the trustee without amount equal to that paid by the trustee without being in breach of the trust. being in breach of the trust.

(2) Subject to Part IV, where a trustee (2) Subject to Part IV, where a trustee pays in whole pays in whole or in partor in part for the supply of services or materials to for the supply of services or materials to an improvement out of an improvement out of money that is loaned to the money that is loaned to the trusteetrustee, trust funds , trust funds may be applied to discharge the may be applied to discharge the loanloan to the extent that the lender's money was so to the extent that the lender's money was so used by the trustee, and the application of trust used by the trustee, and the application of trust money does not constitute a breach of the trust. money does not constitute a breach of the trust.


Subject to Part IV, a trustee may, Subject to Part IV, a trustee may, without being in breach of trust, without being in breach of trust, retain retain from trust fundsfrom trust funds an amount that, as an amount that, as between the trustee and the person the between the trustee and the person the trustee is liable to pay under a contract trustee is liable to pay under a contract or subcontract related to the or subcontract related to the improvement, is improvement, is equal to the balance in equal to the balance in the trustee's favour of all outstanding the trustee's favour of all outstanding debts, claims or damages, whether or debts, claims or damages, whether or not related to the improvementnot related to the improvement. .


s. 13: s. 13:

Section 13(1)Section 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.


s. 13(2)s. 13(2)

The question of whether a person has The question of whether a person has effective control of a corporation or its effective control of a corporation or its relevant activities is one of fact and in relevant activities is one of fact and in determining this the court determining this the court may may disregard the form of any transaction disregard the form of any transaction and the separate corporate existence and the separate corporate existence of any participantof any participant. .

Part II - TrustsPart II - Trusts s. 336 Criminal Codes. 336 Criminal Code

Every one who, being a trusteeEvery one who, being a trustee of anything of anything for the use or benefit, whether in whole or for the use or benefit, whether in whole or in part, of another person, or for a public or in part, of another person, or for a public or charitable purpose, charitable purpose, converts, with intent to converts, with intent to defraud and in contravention of his trustdefraud and in contravention of his trust, , that thing or any part of it to a use that is that thing or any part of it to a use that is not authorized by the trust is not authorized by the trust is guilty of an guilty of an indictable offence and liable to indictable offence and liable to imprisonment for a term not exceeding imprisonment for a term not exceeding fourteen yearsfourteen years. .

Forty Years of Forty Years of FundamentalsFundamentals

Minneapolis-Honeywell Regulator Minneapolis-Honeywell Regulator Co. v. Empire Brass Manufacturing Co. v. Empire Brass Manufacturing Co.Co.

[1955] 3 D.L.R. 561 (S.C.C.)[1955] 3 D.L.R. 561 (S.C.C.)

FactsFacts Plaintiff supplied materials to a mechanical Plaintiff supplied materials to a mechanical

subcontractorsubcontractor Empire Brass supplies materials to the same Empire Brass supplies materials to the same

subcontractorsubcontractor Empire Brass thought they could get a jump Empire Brass thought they could get a jump

on the plaintiff and others by taking an on the plaintiff and others by taking an assignment of the subcontractor’s receivables assignment of the subcontractor’s receivables on four projectson four projects

Empire Brass collected on the assignmentsEmpire Brass collected on the assignments Plaintiff and others empty-handed because, in Plaintiff and others empty-handed because, in

theory, no money was ever “received” by the theory, no money was ever “received” by the subcontractorsubcontractor

Question: Is this fair?Question: Is this fair?

DecisionDecision

Monies payable by an owner to a Monies payable by an owner to a contractor are contractor are deemed to have been deemed to have been receivedreceived by that contractor. by that contractor.

““For obvious reasons this [the lien] is For obvious reasons this [the lien] is but a partial security; too often the but a partial security; too often the contract price has been paid in full contract price has been paid in full and the security of the land is and the security of the land is gone. It is to meet that situation that gone. It is to meet that situation that s. 19 [contractor’s trust] has been s. 19 [contractor’s trust] has been added. The contractor and sub-added. The contractor and sub-contractor are made trustees of the contractor are made trustees of the contract moneys and the trust contract moneys and the trust continues while employees, material continues while employees, material men or others remain unpaid.” men or others remain unpaid.”

““I cannot interpret the word “received” I cannot interpret the word “received” in s. 19 as not including money paid to in s. 19 as not including money paid to an assignee. The money “received” on an assignee. The money “received” on account of the contract is the same as account of the contract is the same as that paid by the contractor: that paid by the contractor: payment is payment is the correlative of receiptthe correlative of receipt. The assignee . The assignee acts through the right and power of the acts through the right and power of the assignor; and the receipt by him is assignor; and the receipt by him is likewise that by the creditor. likewise that by the creditor. If this were If this were not so, the entire purpose of the section not so, the entire purpose of the section could be nullified by an assignment could be nullified by an assignment contemporaneous with the contractcontemporaneous with the contract.”.”

The reasoning of Rand J. in The reasoning of Rand J. in Minneapolis-Honeywell in 1955 Minneapolis-Honeywell in 1955 anticipates the “purposive” anticipates the “purposive” interpretation theory of he interpretation theory of he Supreme Court of Canada that we Supreme Court of Canada that we see developing 40 years latersee developing 40 years later

Next Major Development:Next Major Development:

Banks’ Liability for breach of Banks’ Liability for breach of trusttrust

T. McAvity & Sons Ltd. v. Canadian T. McAvity & Sons Ltd. v. Canadian Bank of CommerceBank of Commerce (1959), 17 D.L.R. (1959), 17 D.L.R. (2d) 529 (S.C.C.)(2d) 529 (S.C.C.)

John M.M. Troup Ltd. v. Royal BankJohn M.M. Troup Ltd. v. Royal Bank (1963), 34 D.L.R. (2d) 556 (S.C.C.)(1963), 34 D.L.R. (2d) 556 (S.C.C.)

McAvityMcAvity

FactsFacts:: McAvity constructs sewers and McAvity constructs sewers and

watermains for a contractorwatermains for a contractor Contractor runs out of moneyContractor runs out of money Bank takes progress payments to Bank takes progress payments to

reduce overdraft, pursuant to a reduce overdraft, pursuant to a general assignment of book debtsgeneral assignment of book debts

QuestionQuestion

Is theIs the bank liable for breach of bank liable for breach of trust?trust?

AnswerAnswer: :

The bank is a stranger to the trust The bank is a stranger to the trust and can only be liable if it is a party and can only be liable if it is a party to a breach of trust by someone who to a breach of trust by someone who is a trustee, i.e. their customeris a trustee, i.e. their customer

TroupTroup

FactsFacts:: Troup and others were subcontractorsTroup and others were subcontractors They did not file liensThey did not file liens The final holdback payment deposited The final holdback payment deposited

into the contractor’s account was into the contractor’s account was applied to reduce the contractor’s applied to reduce the contractor’s overdraftoverdraft

Contractor ran high volume blended Contractor ran high volume blended account for many jobsaccount for many jobs

Question:Question:

The bank knew its customer was a The bank knew its customer was a contractorcontractor

Was this enough to fix it with Was this enough to fix it with liability for breach of trust?liability for breach of trust?

Answer:Answer:With a strong dissent by Justice With a strong dissent by Justice

Locke: NOLocke: NO

40 Years Later40 Years Later

Arthur Andersen Inc. v. Toronto-Arthur Andersen Inc. v. Toronto-Dominion BankDominion Bank (1994), 17 O.R. (1994), 17 O.R. (3d) 363 (Ont. C.A.)(3d) 363 (Ont. C.A.)

Gold v. RosenbergGold v. Rosenberg (1997), 152 (1997), 152 D.L.R. (4D.L.R. (4thth) 385 (S.C.C.)) 385 (S.C.C.)

Citadel General Assurance Co. v. Citadel General Assurance Co. v. Lloyds Bank CanadaLloyds Bank Canada (1997), 152 (1997), 152 D.L.R. 411 (S.C.C.)D.L.R. 411 (S.C.C.)

Arthur AndersenArthur Andersen

Facts:Facts: Busy high volume construction accountBusy high volume construction account ““Mirror accounting practice” Mirror accounting practice”

implemented at bank’s suggestion, implemented at bank’s suggestion, resulting in daily breaches of trustresulting in daily breaches of trustConflicting interests:Conflicting interests:

Bank’s interest in efficient banking Bank’s interest in efficient banking practicespractices

Public’s interest in enforcement of Public’s interest in enforcement of statutory trusts for benefit of trades and statutory trusts for benefit of trades and supplierssuppliers

Arthur AndersenArthur AndersenQuestion:Question:

How do we resolve these competing How do we resolve these competing interests?interests?

Answer:Answer:

(a middle ground)(a middle ground) Issue is resolved as one of knowledge on the Issue is resolved as one of knowledge on the

part of the bank in question.part of the bank in question.

When does a bank have sufficient knowledge When does a bank have sufficient knowledge of the source and application of a customer’s of the source and application of a customer’s funds?funds?

Gold / CitadelGold / Citadel Two decisions of S.C.C. released on the Two decisions of S.C.C. released on the

same day in 1997, neither of them is a same day in 1997, neither of them is a construction case, but both deal with construction case, but both deal with strangers to the truststrangers to the trust

Two kinds of liability:Two kinds of liability:

Knowing assistanceKnowing assistance fault-based accessory’s liability fault-based accessory’s liability

Knowing receiptKnowing receipt receipt-based liability demanding a receipt-based liability demanding a

restitutionary remedy restitutionary remedy

Revolution of trust law in Revolution of trust law in the 90sthe 90s

The Overhead The Overhead CasesCases

Ont. C.A. Trilogy:Ont. C.A. Trilogy:

Rudco Insulation Ltd. v. Toronto Rudco Insulation Ltd. v. Toronto Sanitary IncSanitary Inc. .

(1998), 42 O.R. (3d) 292(1998), 42 O.R. (3d) 292 Dietrich Steel Ltd. v. Shar-Dee Dietrich Steel Ltd. v. Shar-Dee

TowersTowers

(1999), 42 O.R. (3d) 749 (1999), 42 O.R. (3d) 749 Tam-Kal Ltd. v. Stock MechanicalTam-Kal Ltd. v. Stock Mechanical

(2000), 50 C.L.R. (2d) 224(2000), 50 C.L.R. (2d) 224

Rudco:Rudco:

Facts:Facts: Contractor uses trust funds to pay Contractor uses trust funds to pay

generalgeneral overhead expenses overhead expenses Question? Question? Is this a permissible use of trust Is this a permissible use of trust

moneymoney AnswerAnswer:: Categorically: NOCategorically: NO

Dietrich:Dietrich:

Facts:Facts: Contractor uses trust funds to pay Contractor uses trust funds to pay

for for sitesite specificspecific overhead expenses overhead expenses related to a single jobrelated to a single job

QuestionsQuestions:: Is this permissible?Is this permissible? Does section 35 Trustee Act provide Does section 35 Trustee Act provide

a defence?a defence?

Answer:Answer:

NO, and NO again!NO, and NO again!

Tam-Kal:Tam-Kal:

Affirms Affirms RudcoRudco & & Dietrich,Dietrich, without much discussionwithout much discussionConclusions:Conclusions:1. Don’t even think about it!1. Don’t even think about it!2. Most contractor operate in 2. Most contractor operate in breach breach of trust every day of trust every day anyway.anyway.

The Commingling CasesThe Commingling Cases

Arborform Countertops v. StellatoArborform Countertops v. Stellato

(1996), 29 O.R. (3d) 129(Ont. Gen. (1996), 29 O.R. (3d) 129(Ont. Gen. Div.)Div.)

St. Mary’s Cement Corp. v. St. Mary’s Cement Corp. v. Construc LtdConstruc Ltd. (1997), 32 O.R. (3d) . (1997), 32 O.R. (3d) 595 (Ont. Gen. Div.)595 (Ont. Gen. Div.)

S.E. Rozell & Sons Inc. v. GroffS.E. Rozell & Sons Inc. v. Groff

(2000), 2 C.L.R. (3d) 58 (Ont. S.C.J.)(2000), 2 C.L.R. (3d) 58 (Ont. S.C.J.)

ArborformArborform

Facts:Facts: Supplier manufactured and supplied Supplier manufactured and supplied

countertops to improvement to be countertops to improvement to be made to various propertiesmade to various properties

Supplier remains unpaidSupplier remains unpaid Contractor pays itself out of its one, Contractor pays itself out of its one,

blended operating account by means blended operating account by means of set-off for alleged deficiencies on of set-off for alleged deficiencies on several projectsseveral projects

Question:Question:Is the company’s banking practice, Is the company’s banking practice,

on its own, a breach of trust?on its own, a breach of trust?

Answer:Answer:

Yes.Yes.

Reasons:Reasons:

““I am satisfied that the authorities on this issue I am satisfied that the authorities on this issue are clear, and are clear, and I agree, that a failure to set up a I agree, that a failure to set up a proper system to receive, monitor and disburse proper system to receive, monitor and disburse trust funds is sufficient, in and of itself, to trust funds is sufficient, in and of itself, to constitute a breach of trustconstitute a breach of trust. Indeed, a trustee . Indeed, a trustee need not intend to breach the trust nor must he need not intend to breach the trust nor must he or she act fraudulently in order to be found or she act fraudulently in order to be found liable for the breach of trust. liable for the breach of trust. The law, in my The law, in my view, is clear, a breach of trust occurs if the view, is clear, a breach of trust occurs if the trustee carries on business through one general trustee carries on business through one general operating account into which trust moneys are operating account into which trust moneys are deposited and are thereby intermingled with deposited and are thereby intermingled with non-trust fundsnon-trust funds; ;

Reasons (cont’s)Reasons (cont’s)

““if the trustee keeps inaccurate or if the trustee keeps inaccurate or incomplete records with respect to the incomplete records with respect to the receipt and disbursal of funds; and, receipt and disbursal of funds; and, generally, if the trustee deals with trust generally, if the trustee deals with trust funds in a manner inconsistent with the funds in a manner inconsistent with the trust. Moreover, in these circumstances, trust. Moreover, in these circumstances, even ‘hard working, sincere people who even ‘hard working, sincere people who tried to do the best they could in all the tried to do the best they could in all the circumstances’ will be found liable for circumstances’ will be found liable for breach of trustbreach of trust.”.”

St. Mary’s CementSt. Mary’s Cement Facts:Facts: Plaintiff supplied concrete products to a Plaintiff supplied concrete products to a

number of projects upon which the number of projects upon which the corporate defendant was contractorcorporate defendant was contractor

Corporate defendant went out of businessCorporate defendant went out of business Plaintiff sued officers and directorsPlaintiff sued officers and directors Contractor had operated two blended Contractor had operated two blended

account for all projectsaccount for all projects Contractor had no detailed accounting on Contractor had no detailed accounting on

a project by project basisa project by project basis

Question:Question: Is the company’s banking Is the company’s banking

practice, on its own, a breach practice, on its own, a breach of trust?of trust?

AnswerAnswer::

Yes.Yes.

Reasons:Reasons:

The Act contemplates a separate trust fund for every The Act contemplates a separate trust fund for every project in which the contractor is involved and project in which the contractor is involved and separate accounting for every trust fund. It is only by separate accounting for every trust fund. It is only by separately accounting for the moneys held in trust separately accounting for the moneys held in trust that a contractor can ensure that trust moneys are that a contractor can ensure that trust moneys are not in fact applied to other purposes. not in fact applied to other purposes. The fact that The fact that the Act does not expressly require that trust funds be the Act does not expressly require that trust funds be kept separate from the general accounts of the kept separate from the general accounts of the contractor is not determinative of whether a failure to contractor is not determinative of whether a failure to do so constitutes a breach of trustdo so constitutes a breach of trust. A trustee has an . A trustee has an obligation to protect the trust funds. obligation to protect the trust funds. Allowing trust Allowing trust funds to be intermingled with other moneys and used funds to be intermingled with other moneys and used for general purposes is inconsistent with the trustee's for general purposes is inconsistent with the trustee's duty to maintain proper control of the trust funds.duty to maintain proper control of the trust funds.

S.E. RozellS.E. Rozell

Facts:Facts: Plaintiff is subcontractorPlaintiff is subcontractor General contractor maintains one bank General contractor maintains one bank

account for all aspects of its businessaccount for all aspects of its business All receipts were commingledAll receipts were commingled Everything, including overheads, was Everything, including overheads, was

paid out of this accountpaid out of this account Plaintiff chose to sue personal Plaintiff chose to sue personal

defendants instead of corporate defendants instead of corporate defendantdefendant

Question:Question: Is the company’s banking Is the company’s banking

practice, on its own, a breach practice, on its own, a breach of trust?of trust?

AnswerAnswer::

Yes.Yes.

Reasons:Reasons:

““While it is true that s. 8 does not prohibit While it is true that s. 8 does not prohibit the commingling of trust funds with other the commingling of trust funds with other funds, the weight of the case law seems to funds, the weight of the case law seems to be to the effect that commingling places be to the effect that commingling places the trust funds at risk, and merely the trust funds at risk, and merely exposing them to that unnecessary risk is exposing them to that unnecessary risk is an act which is inconsistent with the high an act which is inconsistent with the high standards expected of a trustee. standards expected of a trustee. The fact The fact that, in the end, the risk is not realized is that, in the end, the risk is not realized is immaterial - good luck should not be a immaterial - good luck should not be a defence to a breach of trustdefence to a breach of trust.”.”

The Owner’s Trust CaseThe Owner’s Trust Case

Structural Contractors Ltd. v. Structural Contractors Ltd. v. Westcola Holdings Inc.Westcola Holdings Inc. (2000), 48 (2000), 48 O.R. (3d) 417 (Ont. C.A.)O.R. (3d) 417 (Ont. C.A.)

FactsFacts

Westcola owned office building in TorontoWestcola owned office building in Toronto Largest tenant (government) occupied 75% Largest tenant (government) occupied 75%

of buildingof building Westcola retained Structural to renovate Westcola retained Structural to renovate

underground parking garageunderground parking garage Payments from Westcola to Structural were Payments from Westcola to Structural were

to be certified by payment certifierto be certified by payment certifier Contract price doubled as work progressedContract price doubled as work progressed

Facts (continued)Facts (continued) Government lease ran outGovernment lease ran out Government chose not renew because of Government chose not renew because of

ongoing ocnstructionongoing ocnstruction Owner’s cash flow stoppedOwner’s cash flow stopped Owner used rent payments from government Owner used rent payments from government

exclusively to service mortgage debt, utility exclusively to service mortgage debt, utility bills, maintenance costs, insurance and bills, maintenance costs, insurance and property taxesproperty taxes

No personal benefit to landlord whatsoeverNo personal benefit to landlord whatsoever Engineers certified substantial completionEngineers certified substantial completion Unpaid contractor sued owner of company Unpaid contractor sued owner of company

personally personally

Landlord’s ArgumentsLandlord’s Arguments

It cannot be breach of trust merely It cannot be breach of trust merely to service mortgage and pay to service mortgage and pay utilities, because without doing so, utilities, because without doing so, there would be no rentsthere would be no rents

It would be grossly unfair to find the It would be grossly unfair to find the owner personally liable in such a owner personally liable in such a case, because nobody could have case, because nobody could have foreseen such liabilityforeseen such liability

Court of Appeal’s Court of Appeal’s Response:Response:

Rents became trust funds to the Rents became trust funds to the extent of certified but unpaid funds extent of certified but unpaid funds due to Structuraldue to Structural

Owner is personally liable for these Owner is personally liable for these trust fundstrust funds

Landlord’s attempt to draw distinction Landlord’s attempt to draw distinction between s. 7 (owner’s trust) and s. 8 between s. 7 (owner’s trust) and s. 8 (contractor’s trust) cannot prevail (contractor’s trust) cannot prevail given the language of s. 7(4)given the language of s. 7(4)


The owner is the trustee of the trust The owner is the trustee of the trust fund created by subsection (1), (2) fund created by subsection (1), (2) or (3), and the owner or (3), and the owner shall not shall not appropriate or convert any part of a appropriate or convert any part of a fund to the owner's own use or to fund to the owner's own use or to any use inconsistent with the trustany use inconsistent with the trust until the contractor is paid all until the contractor is paid all amounts related to the improvement amounts related to the improvement owed to the contractor by the owner. owed to the contractor by the owner.

Court of Appeal Reasons:Court of Appeal Reasons:

The appellants argue that the same The appellants argue that the same considerations do not apply to s. 7, particularly considerations do not apply to s. 7, particularly where the funds are received on account of where the funds are received on account of rent, without which the owner would be unable rent, without which the owner would be unable to provide the services required by its lease to provide the services required by its lease obligations. I do not see how this submission obligations. I do not see how this submission can prevail given the language of s. 7(4). can prevail given the language of s. 7(4). That argument must be rejected. Westcola is That argument must be rejected. Westcola is essentially a landlord. Rent is not an incidental essentially a landlord. Rent is not an incidental matter to it. Rent is its lifeblood, its matter to it. Rent is its lifeblood, its raison raison d'êtred'être. . To exclude rent from the trust in the To exclude rent from the trust in the case of a landlord would be to exclude Westcola case of a landlord would be to exclude Westcola from the application of s. 7. No justification has from the application of s. 7. No justification has been suggested for such a stepbeen suggested for such a step. .

Where do we go from Where do we go from here?here?

1. Statutory amendment to require 1. Statutory amendment to require separate trust accounts?separate trust accounts?

Discussion was initiated to amend the Act Discussion was initiated to amend the Act to require separate trust accountsto require separate trust accounts

According to Attorney General’s office, According to Attorney General’s office, that discussion is on icethat discussion is on ice

2. Another option:2. Another option: Adopt the New York Model and legislate a Adopt the New York Model and legislate a

way of trust accounting that allows a way of trust accounting that allows a single operating account to be usedsingle operating account to be used

The New York ModelThe New York Model

New York Lien Law expressly provides New York Lien Law expressly provides for a method of keeping books and for a method of keeping books and records relating to trust fundsrecords relating to trust funds

This provides a defendant with at least This provides a defendant with at least a a prima facieprima facie defence to a breach of defence to a breach of trust actiontrust action

Summary judgments as seen in Summary judgments as seen in Westcola would be impossible if Westcola would be impossible if practices were adoptedpractices were adopted

Highlights of the New York Highlights of the New York ModelModel

1. Some overheads are permissible, such as 1. Some overheads are permissible, such as payroll taxes, unemployment insurance payroll taxes, unemployment insurance premiums, wage supplements, surety bond premiums, wage supplements, surety bond premiums.premiums.

2. Books and records shall include2. Books and records shall include

(a) detailed accounting of trust assets receivable (a) detailed accounting of trust assets receivable (names, addresses, amounts, dates)(names, addresses, amounts, dates)

(b) detailed accounting of trust accounts payable(b) detailed accounting of trust accounts payable

(c) detailed accounting of trust accounts received(c) detailed accounting of trust accounts received

(d) detailed accounting of trust accounts made(d) detailed accounting of trust accounts made

Highlights of the New York Highlights of the New York ModelModel

3. Create legal presumptions 3. Create legal presumptions (a)(a) if accounting not followed: presumed if accounting not followed: presumed

breach of trustbreach of trust

(b)(b) If accounting followed: presumed If accounting followed: presumed defence to action for breach of trust defence to action for breach of trust (i.e. no summary judgment)(i.e. no summary judgment)

construction trusts

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