The Construction Act creates a powerful tool for tradespeople who have not been paid by the party they contracted with. The Act creates a trust fund regime that is so powerful and overbearing that it has the ability to set aside the corporate form and direct liability right to the individuals standing behind the corporation.
A recent decision demonstrates the powerfulness of this tool as the Court held the officers and other individuals that were working under the auspices of the defaulting corporation liable for the corporation’s debt.
Background.
The Plaintiff supplied materials to the Defendant Corporation who was a subcontractor. The Defendant Corporation did not pay the Plaintiff’s invoices though the Defendant Corporation was paid by the owner.
The Plaintiff issued a claim against the Defendant Corporation and its officers and other individuals that had “effective control” of the corporation. Hereinafter I will call these folks the Defendant Individuals.
The Claim was not defended. Default judgment was obtained against the Defendant Corporation. A trial was ordered against whether liability should be imposed on the Defendant Individuals.
Analysis.
Plaintiff’s Position.
The Defendant Corporation was a subcontractor under the Act.[1] The Plaintiff’s position is that the by virtue of section 8 and 13 of the Act, the Defendant Individuals were personally liable for the Defendant Corporation’s indebtedness.
The Plaintiff cited the decision of St. Mary’s Cement Corp. v. Construc Ltd., 1997 CanLII 12114, which it argues that it stands for the proposition for the Plaintiff to be successful to impose liability against the Defendant Individuals, it must show (i) the Defendant Individuals received money on account of its contract for the work; and (ii) the Defendant Individuals supplied materials on that project and was not paid.
The onus then shifts to the Defendant Individuals to show that its payments of trust funds complied with the legislation.
Court.
The Court provided some interesting reasoning that the section 13 is not a restatement of the common law trust rather it is a separate and independent statutory scheme for the imposition of liability on certain persons. Specifically, the Court held:
Breach of trust referred to in s. 13(1) is the breach of trust on the part of the corporation. In order to vest that liability upon officers, directors or persons with effective control, the common law is such that it is necessary to demonstrate that those persons are constructive trustees. Under the statutory provisions of s. 13, however, it is unnecessary to make that level [page303] of proof and it is sufficient to demonstrate that persons are within the defined group, and that their conduct falls within the conduct contemplated. The legislature does not require constructive trusteeship to impose liability. The bare statutory statement that certain persons may be held liable for the conduct of others is sufficient.
The Court noting that section 13(1) has a lower threshold than the constructive trustee common law doctrine.
The Court applying the law to the facts held: the Defendant Corporation was fully paid by the owner, the Defendant Individuals were all intricately involved in the transactions with the Plaintiff that caused the indebtedness and for no good reason the Defendant Corporation failed to pay the Plaintiff for those materials.
Lastly, the Court held that the Defendant Individuals had effective control of the Defendant Corporation and all of them knew or ought to have known the Defendant Corporation was in breach of its trust obligations.
Based on the forgoing, the Court found the Defendant Individuals jointly and severally liable for the Defendant Corporation’s indebtedness.
Takeaway.
The trust regime under the Act is a powerful regime. It provides trades a great tool to use that gives them superior right to hold individuals behind a corporation personally liable without using the common law doctrines of constructive trusteeship or piercing the corporate veil. Both of which are reliefs that require a much high threshold than proving breach of trust under the Act.
[1] To note that the Court’s decision is somewhat conflicted on whether the Defendant Corporation was a contractor or a subcontractor. If the owner was making payments to the contractor directly, then it is likely that the Defendant Corporation was a subcontractor. In any case, the trust regime would still apply as the funds paid by the owner are still held in trust by the contractor for the benefit of the subcontractor/suppliers.