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Ontario Divisional Court clarifies the Trust Fund Obligation Under The Construction Lien Act

In Robert Nicholson Construction Co. v. Edgecon Construction Inc., 2016 CarswellOnt 8345, 2016 ONSC 3107, the Ontario Divisional Court decided two matters of importance under the trust fund sections (sections 7-13) of the Ontario Construction Lien Act.

First, the court held that a subcontractor cannot assert a trust fund claim against the owner under the Ontario lien statute. That is because the trust fund obligation is only owed to a person in a contractual relationship with the person alleged to have that obligation. Thus, the owner owes the trust fund obligation to the contractor, and the contractor to the subcontractor. But the owner in this case did not owe such a duty to the subcontractor who was asserting the claim. As the court said:

“In other words, the Respondent concedes that the motion judge erred in law when he found that a subcontractor could be a beneficiary of the statutory trust fund created under s. 7(1) of the Act, as the wording of that section is clear; the owner’s trust fund exists “for the benefit of the contractor”. Under s. 8 of the Act, a separate and distinct trust obligation is imposed on contractors and subcontractors, the beneficiaries of which are other subcontractors (Colautti Construction Ltd. V. Ashcroft Developments Inc. et al, 2011 ONCA 359 (C.A.) at para. 73).

Since this decision was based upon a concession of the subcontractor, it may not have great weight, but it does apply the Ontario Court of Appeal’s decision in the Calautti case. In the latter case, the claim was by the owner against the contractor based upon the trust fund section, which seems like a non-starter from the beginning.

Most but not all of the provincial lien statutes provide that the beneficiaries of the trust fund obligation are the persons contracting at the next lowest level in the payment pyramid with the person owing a trust fund obligation. Under the New Brunswick lien statute, however, the beneficiaries are not limited to those persons who have a contract with the person owing a trust fund obligation, and include any persons providing services and materials to the improvement.

Second, the court addressed the subcontractor’s argument that the owner controlled the contractor because it paid the contractor. Section 13 of the Ontario Act says that any person who “has effective control of a corporation or its relevant activities” is also liable for a breach of the trust fund obligation by that corporation. As the court said, the subcontractor alleged that because the owner “had control over sending the general contractors the money they were entitled to, the [owner] had effective control of one of the general contractors’ “relevant activities”. As put by the [subcontractor], since the [owner] “held the purse strings”, they had “effective control”.”

The Divisional Court dismissed this argument as follows:

To allow this argument to succeed would mean that every owner is potentially liable under this section. Furthermore, in construction projects that are financed by lending institutions, the payments to general contractors can come directly from those lending institutions. According to the Respondent’s argument, those lending institutions could also be exposed to liability under s. 13…..It would be an absurd reading of the Act to find that someone who makes payments to a corporation has control over one of the payee corporation’s “relevant activities”, for the purpose of meeting the first precondition for liability under s. 13.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, parts 6(i) and (v)

Robert Nicholson Construction Co. v. Edgecon Construction Inc., 2016 CarswellOnt 8345, 2016 ONSC 3107

Construction Liens – Trust Fund obligation –beneficiaries of trust fund – effective control of contractor

Thomas G. Heintzman O.C., Q.C., FCIArb                            June 29, 2016

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.