A recent case reminds us how powerful statutory trusts are. Breaches of trusts can hold the person controlling the corporation liable for the breach of contract liabilities of the corporation.
Background.
The contractor, the Plaintiff, was retained by the commercial property owner to build what appears to be a plaza that will include a pub/restaurant, butcher shop, food market and commercial offices. The contract that was used was a CCDC. The fee arrangement was based on time and materials.
The Plaintiff was of the view there was an agreed fixed price.
The relationship broke down as a result of non-payment. CCDCs appoint a “Consultant” to administer payments. The Consultant’s role was limited at outset but became more involved when there was non-payment.
The Defendant registered a lien on the property. Soon thereafter, the Consultant certified a significant amount and declared that it was due.
Next, the Consultant certified the work on the project was substantially performed.
Positions.
The Defendants agreed an amount was owing but was disputing the amount. It appears the Defendants were taking issue with the timeliness and quality of the work.
The Plaintiff asserted the monies received by the Defendants after the date of substantial performance were impressed with a statutory trust, regardless of their source.
The Defendants’ principal owned commercial and residential properties and other businesses throughout the province. Revenue was generated by those entities.
The Defendants had sold property but could not answer dispositively where the proceeds went. During the litigation, another property was sold. On cross-examination, the Plaintiff asked for the details of the revenue and payments the Defendants had received since the date of certification of substantial performance. It was not provided.
Court.
(1) Applicability of Summary Judgment
The Court came to the view that it can dispose of this case through a summary judgment motion. There were extensive affidavits and cross-examinations done to give the Judge confidence to justly decide the case.
(2) Judgment in Favour of Defendants
The Court found the CCDC only contemplated a time and materials arrangement. There was a document called estimate that contained a specific amount. However, the Court held the contract “does not purport to amend, let alone supersede, the terms of the agreement the parties had negotiated and signed”
The Court concluded the fee structure was a time and materials structure rather than fixed price.
In respect of the delay, the Court held the contract stated there was an anticipated completion date and no definitive date. The Plaintiff also had evidence from architecture technologist who was on-site who deposed there were no issues on how the project was progressing.
The Court also held the substantial performance certificate obligated the Defendants to make payment notwithstanding minor deficiencies.
The Court found in favour of the Plaintiff and gave it Judgment against the Defendants.
(3) Judgment Personally against Defendant for Breach of Trust
The Plaintiff’s posited that the Consultant had issued payment certificates and a certificate of substantial performance, and therefore, a trust is impressed against the Defendants for the benefit of the Plaintiff.
The Plaintiff relies on subsection 7(2) of the Construction Act on this point.
The Court reviewed some authorities and concluded that monies that were in the hands or were received after the issuances of the certificates and a certificate of substantial performance constituted a trust fund in favour of the Plaintiff.
It was clear the principal of the Defendant was receiving monies after the certificates. These monies were in excess of the amount owed to the Plaintiff. The Court ruled a trust has been established and the onus shifts to the Defendant to prove how the trust funds were used.
The Court noted the Defendants did not respond to this legal principle. Following the authority St. Mary’s Cement Corporation v. Construc Ltd. (1997) – where a Court held:
[a trustee] who deposits trust funds into a general business bank account and intermingles them with other funds from other sources does so at [its] peril.
The Court concluded the Defendant is liable for breach of trust as the monies it received after the certificates were impressed by a trust. The Defendant failed to account or pay the Plaintiff the receipted funds.
(4) Judgment Personally against Principal of Defendant for Breach of Trust
The Construction Act has a special provision that becomes relevant once there is a breach of trust. Section 13(1) puts the liability of the breach of trust against the director, officer and any person who has effective control of a corporation “who assents to, or acquiesces in, conduct that he…knows or reasonably ought to know amounts to a breach of trust by the corporation is liable for the breach of trust”
The principal of the Defendant is the officer and director of the Defendant. There was evidence he controlled the Defendant.
The Court found the principal was an experienced businessperson and it was clear he knew or ought to have known that after the certificates were issued, monies received by the Defendant from whatever source, were impressed with a trust.
The Court gave Judgment against the principal personally.
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