Building Trust
Liability for Breach of Trust under the Construction Lien Act

Woodbridge corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, describes the fundamentals of the Ontario Construction Lien Act and under what conditions a party could be liable for breach of trust under the Act.

In a low-supply and overheating Toronto real-estate market, construction of new residential properties cannot seem to go quick enough to satisfy demand. What legal framework exists to regulate construction funding and how is each party, may it be the property owner or the contractor, affected in their rights and obligations? – Let’s have a look at the Ontario Construction Lien Act.

What is the Construction Lien Act?

The Ontario Construction Lien Act (the “Act”) sets forth the trust obligations of various parties involved in the construction industry, including, property owners, contractors, and subcontractors. Under the Act, any sum of money received by a party for the purpose of paying for the costs of an improvement (e.g. alteration to a plot of land) constitutes a trust fund, which is held for the benefit of another party.

The Construction Trust Fund

For instance, s.8(1) of the Act states that all amounts of money owing to or received by a contractor or subcontractor “on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor.” Under this section of the statute, the contractor or subcontractor is considered to be a “trustee” of the trust fund.

The trustee of a trust fund (i.e. owner, contractor or subcontractor) has a statutory obligation to refrain from appropriating or converting any portion of the fund for his or her own use or for any other use that is inconsistent with the purpose of the fund until the other party receives payment for all amounts owed to him or her by the trustee regarding an improvement to a given property. A trustee that fails to comply with his or her statutory obligation will be held liable for breach of trust.

What constitutes a Breach of Trust?

In the case of a property owner who receives sums of money for the purpose of financing the costs of an improvement to the property, such monies constitute a trust fund. The owner cannot make use of this fund for any purpose until the contractor who has been hired to make the improvement has been paid all amounts owed to him or her by the owner. If the owner fails to meet his or her obligations, he or she will have committed a breach of trust. By comparison, a contractor who has been hired by a property owner must refrain from using money provided by the owner (i.e. a trust fund) until all subcontractors and suppliers who are owed money from the contractor have been fully paid for supplying services and materials for the property improvement. If, for instance, the contractor uses the trust fund to pay for overhead expenses prior to paying the subcontractors and suppliers in full, then the contractor’s actions will amount to a breach of trust. The same trust obligations apply to subcontractors who are hired to perform work on a property.

Personal Liability of other Parties

In addition to those parties who may be held liable for violating the trust provisions of the Act, several other persons may be found personally liable under the Act for breach of trust by a corporation. Pursuant to s.13(1) of the Act,

(a) every director or officer of a corporation; and
(b) any person, including an employee or agent of the corporation, who has effective control of a corporation or its relevant activities,

who assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust. R.S.O. 1990, c. C.30, s. 13 (1).

In determining whether a person has “effective control of a corporation or its relevant activities,” the court will look to the facts of a given case. In doing so, the court may disregard the form of the transaction in question and the “separate corporate existence” of the participants involved. In the event that two or more persons have been found liable or have admitted to liability for a specific breach of trust under the Act, those persons will be deemed jointly and severally liable for the breach. Unless the court decides otherwise, such persons may recover contributions from one another so as to ensure that there is an equal contribution by each person liable for the breach of trust.

Do you have questions about the Construction Lien Act or are you a property owner or contractor in a situation that requires legal assistance? – Please contact me directly for a no-obligation consultation.