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An Overview of Construction Trusts

Section 8 is a statutory imposed trust often overlooked as a remedy for unpaid contractors, subcontractors and suppliers. In general, once the Plaintiff passes the legal elements of being a beneficiary or establishes the existence of the trust, the provision allows the Plaintiff the right to share in the fund. Further, a breach of trust claim may allow the Plaintiff or beneficiary to pierce the corporate veil and secure their status as a creditor even if the Defendant were insolvent.

Note: the Construction Act, RSO 1990, c C.30. came into force on July 1, 2018, and replaces the former Construction Lien Act.

Construction Trust Takeaways

  • The trustee must hold trust funds until it has paid all claims relating to the project. The trustee cannot divert monies even when it has received more credit than it is obligated to pay.

  • The Defendant or trustee is accountable for all expenditures from the fund. Once the Plaintiff establishes trust, the Defendant or trustee must show that it has paid all the monies conforming to the Act.

  • The trustee cannot escape its trust obligations by showing it paid out more than it received. The trust takes priority over the trustee paying itself, and the trustee cannot deduct its overhead out of trust funds.

Leading Cases

Two crucial case law developments relating to trust provisions under the Construction Act are Sunview Doors Ltd v Academy Doors & Windows Ltd, 2010 ONCA 198 and Citadel General Assurance Co v Lloyds Bank Canada, [1997] 3 SCR 805.

In breach of trust claims, the initial onus is on the Plaintiff to prove the existence of a trust under section 8 of the Act. The Plaintiff needs to show that the Defendant or trustee received money on account of its contract price for the particular project, that the Plaintiff supplied materials on that project, and that the Defendant or trustee owes money to the Plaintiff for those materials. All these elements must be proven before statutory trust provisions come into play.

Sunview enables suppliers to assert trust fund claims even if they cannot trace their supplies to a specific job site. If the Plaintiff can show that it supplied materials for improvement to the trustee, and can connect the trustee to a job site, then the trustee bears the onus of proving all the funds received on the project are disbursed to the proper creditors involved in the project. In the absence of such proof, the Plaintiff will be able to assert rights against the Defendant and against the Defendant’s employees, officers, directors, and third parties who are in receipt of the trust funds.

In Citadel General Assurance, the SCC considered three ways in which a stranger to trust could be held liable for breach of trust:

  1. For being a person who has no authority as a trustee but meddles with the trust property;

  2. For “knowing assistance”; and

  3. For “knowing receipt.”

Citadel shows that the cause of action in “knowing receipt” has two advantages. First, the trust is statutorily imposed; therefore, no Defendants can assert unawareness. Second, the SCC explains that the “knowledge” threshold is a low one. Facts sufficient to put a reasonable person on inquiry will establish constructive knowledge for purposes of “knowing receipt” even if they are insufficient to meet the higher test in “knowing assistance.” When a party is dealing with a contractor and receives money from the contractor that it knows or ought to know come from a construction project, then there is strong basis for a claim in “knowing receipt.”

In summary, the Construction Act is a formidable statute, and the concept of trusts and liens is daunting to most. Readers are advised to seek proper legal advice.

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