Trust Fund Set Off Rights Are Not Available If No Trust Fund Is Maintained and No Lien Claim Is Made: Ontario Court Of Appeal

The Ontario Court of Appeal recently considered the scope of the right of set-off under the trust fund sections of the Ontario Construction Lien Act (the Act) and under equitable set-off under a contract claim.

In Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., the Court of Appeal held that the owner could not rely on the trust fund set off provisions contained in section 12 of the Act because neither party was relying upon the Act, nor had they proven that trust funds were in existence. The defendant contractor could not assert an equitable set-off because the claims allegedly resulting in the set off arose on other projects and did not qualify as equitable set-offs.

Effectively, the Court of Appeal proceeded on the basis that the right of set-off under the trust fund sections of the Act is broader than the equitable right of set-off. If so, this raises important issues about the nature of setoff in both situations.


Provincial Store hired Architectural Millwork to install millwork manufactured by Provincial Store at an OLG Casino construction project. Provincial Store did not raise any complaint about Architectural Millwork’s work on the OLG Casino Project and admitted that the monies claimed by Architectural Millwork on that project were owed. However, Provincial Store claimed a right of set-off arising from claims on another unrelated construction project.

The motion judge rejected the Provincial Store’s claim for set-off and Provincial Store appealed that decision to the Court of Appeal. The Court of Appeal dismissed the appeal.

Court Of Appeal’s Decision

As it had before the motion judge, Provincial Store asserted that it could rely on the set-off provision in section 12 of the Act. That section reads as follows:

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

While the word “set-off” is not contained in section 12, the title to the section is Set-off by trustee. The section does create a sort of set-off in favour of a trustee – be it the owner, contractor, or other person down the contractual chain in a construction project – in respect of monies payable by that person under a contract to the next person down the chain – the contractor, subcontractor or supplier.

Provincial Store was saying in its argument that the monies it had not paid to Architectural Millwork on the OLG Casino project were trust monies and that, by virtue of section 12, it could set off against those monies all outstanding debts, claims or damages, including its claim against Architectural Millwork on another project. The problem was that it had not asserted that position in its pleading nor proven it with facts, and neither had Architectural Millwork. Neither had relied on or referred to the Act in their pleadings or led substantial evidence on this point. In these circumstances, the Court of Appeal held that Provincial Store could not rely upon section 12.

The Court Said:

“The availability of the right of set-off under s. 12 of the CLA requires the party seeking to exercise it to prove the existence of specific circumstances and particular considerations, including the existence of trust funds against which set-off can be applied. If no trust funds are retained or all the monies are spent, the purpose of the trust provisions is defeated and any right of set-off is extinguished. In the present case, neither party pleaded the existence or breach of a trust fund. The respondent did not assert any claim to trust funds. The appellant did not allege there was a trust fund under the CLA or at all. Rather, the appellant pleaded that it had not been paid by the owner for the work performed by the respondent and therefore had no obligation to pay the respondent’s invoices, negating the existence of a trust fund….While there was evidence from the appellant’s representative, Regina Dee, that the appellant had received monies from the owner, there was no evidence that those monies were held in trust or retained at all. In a subsequent answer to undertakings, the appellant admitted that it did not maintain a separate bank account for the OLG Brantford Casino Project….As a result, the appellant has no right under s. 12 of the CLA to set-off against the monies that it admits are owed…” (underlining added)

The Court of Appeal also affirmed the motion judge’s decision that Provincial Store could not assert an equitable right of set-off “because payment on one project was not tied to the other, funds were segregated, and the projects were undertaken at different times, in different cities and for different owners.”


This decision underlines how broad the right of set-off is under trust fund sections of the lien statutes. The Court of Appeal effectively acknowledged that the statutory set-off right could be asserted in circumstances in which an equitable right of set-off – itself a very broad form of set-off – could not be asserted. There is no apparent limit on the right of setoff contained in the trust fund section, although the Court of Appeal did say that it does not allow the trustee “to put some or all of the trust funds retained to general use.” Apparently, Provincial Store did not argue that the set-off in section 12 should be limited to a set-off otherwise recognized in law or equity, and Court of Appeal did not place that limit the ambit to the section.

The decision also underlines the fact that if a party relies on the trust fund section, then it must make a pleading to that effect and prove the facts that establish that a trust fund exists. The Court of Appeal may have been somewhat skeptical about a contractor asserting that it owed a trust fund obligation, and then asserting rights in its favour because of that obligation. Be that as it may, the next time that a party seeks to use the trust fund right in this reverse fashion, that party would be best to allege and prove that a trust fund has actually been retained and exists.

One may wonder why a set off against statutory trust funds should be wider than the set-off allowed either at law or in equity. One would have thought that trust funds mandated to be retained by the Construction Lien Act should be more vigilantly protected than other funds, and that any right of setoff under that Act should be no wider than what the law and equity otherwise provide. But, in section 12, the legislature has said “all outstanding debts, claims or damages” whether or not they arise under the project in question, and “all” does seem to mean “all”, at least apparently under this decision. The rationale may be that, having imposed a trust fund obligation on a party to a construction project when one otherwise would not exist, the legislature felt that the trustee should be entitled to take into account any other possible countervailing obligation that the beneficiary may owe.

This decision will likely be relevant to other set-off section contained in the Act, sub-section 17(3). That section permits a set-off against the value of the lien, subject again to Part IV, being the holdback. Sub-section 17(3) uses the same words that appear in section 12, namely, “all outstanding debts, claims or damages, whether or not related to the improvement.” So it appears that the same broad effect will be given to sub-section 17(3) as the Court of Appeal has given to section 12.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, parts 4(h) and 6.

Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., 2016 CarswellOnt 6796, 2016 ONCA 320

Construction liens – trust fund obligation – set-off against trust fund obligation – equitable set-off

Thomas G. Heintzman O.C., Q.C., FCIArb                               August 7, 2016

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

If You Want Specific Performance, Do You Still Have To Mitigate Your Damages?

Is a party to a contract obligated to mitigate its damages at the same time that it is asking the court to order specific performance? Since the party wants the contract performed, not damages for non-performance, the obligation to mitigate seems to be totally inapplicable.

Yet, in Southcott Estates Inc. v. Toronto Catholic District School Board the Supreme Court of Canada has just held that a plaintiff seeking specific performance may have an obligation to mitigate.  If it doesn’t do so, and the court holds that specific performance should not be granted, then the plaintiff may be awarded very little if any damages.

Building contracts do not often give rise to claims for specific performance. That is because a court cannot readily supervise the conduct of a construction project.  But specific performance is a remedy which is often sought by developers who assemble land for the purpose of construction projects.  So the decision in Southcott has direct implications for companies involved in the assembly of land for building projects.

Factual Background

Southcott was a single purpose company which was part of the Ballantry Group of Companies.  The Toronto Catholic District School Board agreed to sell to Southcott a property which was surplus to its needs. Southcott intended to develop the property for residential purposes.  It was a condition of the agreement that the School Board obtain a severance from the Committee of Adjustment on or before the closing date. The School Board failed to have a development plan prepared and failed to obtain the severance. When the closing date arrived, the School Board refused Southcott’s request to extend the closing date.  The School Board declared the transaction to be at an end, and returned Southcott’s deposit.

Southcott commenced an action for specific performance or, in the alternative, for damages. Southcott succeeded on the merits of the action, and the real question was whether it was entitled to specific performance or damages.

Southcott admitted that it didn’t intend and never tried to mitigate its damages.  It said that it was incorporated solely for the purposes of this project and had no assets other than the money provided by Ballantry. Southcott said that it neither intended to nor tried to purchase other land, especially having regard to its involvement in this action. At trial, the School Board led evidence that 81 parcels of vacant development land in the Greater Toronto Area (GTA) were sold between the date of breach and the date of trial. That land was suitable for residential development. In fact during that period other companies in the Ballantry Group purchased lands which were similar to the subject property.

The Decision

The Supreme Court noted that, in Asamera Oil Corp. v. Seal Oil& General Corp, [1979] 1 S.C.R. 633, it had dealt with the obligation to mitigate in relation to a claim for specific performance.  The Asamera case dealt with an investment contract, not real estate.  In Asamera, the court had said that the plaintiff needed to show “some fair, real, and substantial justification” before a claim for specific performance could be insulated from the obligation to mitigate. If the plaintiff could show some “substantial and legitimate interest” in seeking specific performance as opposed to damages, then the plaintiff might justify its inaction in failing to mitigate.

The Supreme Court also noted that, since its decision in Semelhago v. Paramadevan, [1996] 2 S.C.R. 415, a plaintiff could not assert that every piece of land was “unique” and insist on specific performance of a contract to purchase that piece of land.

The Court then proceeded to deal with three issues:

First, the fact that Southcott was a single purpose company did not exempt it from the general principles applicable to specific performance and mitigation of damages. If it were otherwise, everyone would establish single purpose companies to exempt themselves from these general principles.

Second, Southcott did not have a sufficient justification for its failure to mitigate its damages. The Court said:

“The trial judge made clear findings that the land was nothing more unique to Southcott than a singularly good investment and that this was not a case in which damages were too speculative or uncertain to be an adequate remedy. The unique qualities related solely to the profitability of the development for which damages were an adequate remedy … A plaintiff deprived of an investment property does not have a “fair, real, and substantial justification” or a “substantial and legitimate” interest in specific performance… unless he can show that money is not a complete remedy because the land has “a peculiar and special value” to him…. Southcott could not make such a claim. It was engaged in a commercial transaction for the purpose of making a profit. The property’s particular qualities were only of value due to their ability to further profitability. Southcott cannot therefore justify its inaction.”

Third, the Supreme Court held that there was evidence to support the Court of Appeal’s conclusion that Southcott had suffered no damages.  It agreed with Southcott that the mere fact that Southcott had admitted it did not mitigate its damages did not throw the burden of proof on the damages issue onto Southcott.  Since mitigation of damages was at issue, the normal burden of proof remained on the defendant, the School Board.  However, taken as a whole and in the light of purchases by other Ballantry companies of similar land during the same period, there was evidence to demonstrate that Southcott had suffered no damages.


The Southcott decision shows that the plaintiff – and the defendant – rolls the dice on the same “uniqueness of the property” issue, both for the specific performance claim and the damage claim. If the property isn’t really unique, then the plaintiff won’t be awarded specific performance.  If the property isn’t really unique, then the plaintiff will be denied damages if it doesn’t mitigate. So the parties had better get that issue right, or someone is either going to win or lose both issues. In effect, the plaintiff is either going to obtain specific performance, or (if the damages could have been mitigated) little or no damages.

The second lesson to learn from Southcott is that the uniqueness cannot be solely based on value.  Value can be as much translated into a damage award as into an award for specific performance.  If the property is really valuable, or more convenient, or more developable, in relation to other available properties, then those advantages can be awarded by way of damages.  They may not be an excuse for the plaintiff not searching for reasonable alternative properties.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed.

Chapters 5 and 6, part 1.

Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51

building contracts – remedies – claims – specific performance – damages

Thomas G. Heintzman O.C., Q.C., FCIArb                                                       October 28, 2012

Who Knew That Mary Carter Was Involved In Construction Law?

In Aecon Buildings v. Stephenson Engineering Limited, the Ontario Court of Appeal recently dismissed a construction law claim because a Mary Carter agreement was not immediately disclosed.

A Mary Carter agreement is a settlement agreement between a plaintiff and defendant in which the defendant remains an active party to the litigation and the claim also proceeds against other parties.  Since the defendant continues to participate in the action, the appearance is conveyed that the defendant is still liable to the plaintiff, contrary to the reality of the settlement.  For this reason courts have always insisted that a Mary Carter agreement be immediately disclosed to all parties.  But what happens if it isn’t?  The Ontario Court of Appeal faced that situation in this case.

The general contractor, Aecon, sued the owner, the City of Brampton, for damages due to the delay in the construction project.  The City blamed the consultant for the delay.  The consultant blamed the sub-consultants.

Before the action was commenced, Aecon and the City settled Aecon‘s claim on the basis that Aecon would only recover from the City the amount that the City recovered from the consultant.

While the settlement was effectively made before the action was commenced by Aecon against the City, it was reduced to writing the day after that action was commenced.  Once the action was commenced, the City claimed over against the consultant and the consultant claimed over against the sub-consultants.

Aecon and the City remained active parties in the litigation, but the settlement agreement was not immediately disclosed to the consultant or sub-consultants who only discovered it later through other sources and demanded that it be produced.

The Court of Appeal held that the delay in the disclosure of the settlement agreement amounted to an abuse of process, even though the disclosure did occur before the affected parties were required to plead.  The agreement had only been produced several months after its existence was discovered by the consultants and when it was specifically requested.

The Court said that the only way for it to control its own process, in order to ensure that Mary Carter agreements are immediately produced, was to dismiss the City’s claim against the consultant and thereby the further claims by the consultant against the sub-consultants.  Permitting the litigation to proceed without disclosure of the agreement rendered “the process a sham and amounts to a failure of justice” in the Court’s view.

This decision is a reminder of the drastic remedies available to the Courts if litigation is conducted unfairly.  While Mary Carter agreements are most often used in personal injury or medical malpractice actions, they can also be used to settle construction litigation.  When they are, the parties must be scrupulous to ensure that the agreement is immediately disclosed.  Otherwise, any further claims in the action may well be dismissed.

Aecon Buildings v. Stephenson Engineering Limited, 2010 ONCA 898 (CanLII)

Construction Law – Claims – SettlementAgreement – Litigation – Champertous – Abuse of ProcessMotion                                                    April 3, 2011