Using (and Abiding by) Using (and Abiding by) the Trust Provisions of the the Trust Provisions of the

Construction Lien ActConstruction Lien Act

Duncan W. GlaholtDuncan W. GlaholtGlaholt LLPGlaholt LLP

Trusts – A Road MapTrusts – A Road Map

I. OverviewI. Overview

Part II - TrustsPart II - Trusts

s. 7 - Owner’s trusts. 7 - Owner’s trust s. 8 – Contractor’s s. 8 – Contractor’s

trusttrust s. 9 – Vendor’s trusts. 9 – Vendor’s trust s. 10 – Discharges. 10 – Discharge s. 11 – Reductions. 11 – Reduction s. 12 – Retainages. 12 – Retainage s. 13 – Personal s. 13 – Personal

LiabilityLiability

Owner’s Trust IOwner’s Trust Is. 7.1 – “Amounts Received” s. 7.1 – “Amounts Received”

TrustTrustAll amounts All amounts receivedreceived by an owner, by an owner, other than other than the Crown or a municipalitythe Crown or a municipality, ,

that are to be used in the financing of the that are to be used in the financing of the improvement,improvement,

including any amount that is to be used in the including any amount that is to be used in the payment of the purchase price of the land and payment of the purchase price of the land and the payment of prior encumbrances, the payment of prior encumbrances,

constituteconstitute, subject to the payment of the , subject to the payment of the purchase price of the land and prior purchase price of the land and prior encumbrances, encumbrances, a trust fund for the benefit of a trust fund for the benefit of the contractorthe contractor. .

Owner’s Trust IIOwner’s Trust IIs. 7(2) – “Amounts Payable” s. 7(2) – “Amounts Payable”

TrustTrustWhere amounts become Where amounts become payablepayable under under a contract to a contractor by the owner a contract to a contractor by the owner on a certificate of a payment certifieron a certificate of a payment certifier, ,

an amount that is equal to an amount an amount that is equal to an amount so certifiedso certified that is in the owner's hands that is in the owner's hands

or received by the owner at any time or received by the owner at any time thereafterthereafter

constitutes a trust fund for the benefit constitutes a trust fund for the benefit of the contractorof the contractor. .

Owner’s Trust IIIOwner’s Trust IIIs. 7(3) – “Holdback” Trusts. 7(3) – “Holdback” TrustWhere the substantial performance of Where the substantial performance of a contract has been certifieda contract has been certified, or has , or has been declared by the court, been declared by the court, an amount that is equal to the unpaid an amount that is equal to the unpaid priceprice of the substantially performed of the substantially performed portionportion of the contract that is in the of the contract that is in the owner's hands or is received by the owner's hands or is received by the owner at any time thereafterowner at any time thereafterconstitutes a trust fund for the benefit constitutes a trust fund for the benefit of the contractorof the contractor. .

Owner’s Trust IVOwner’s Trust IVs. 7(4) – “Prohibition”s. 7(4) – “Prohibition”

The owner is the trustee of the trust The owner is the trustee of the trust fund created by subsection (1), (2) or (3), fund created by subsection (1), (2) or (3),

and the owner and the owner shall not appropriate or shall not appropriate or convert any part of a fund to the owner's convert any part of a fund to the owner's own use or to any use inconsistent with own use or to any use inconsistent with the trustthe trust

until the contractor is paid all amounts until the contractor is paid all amounts related to the improvement owed to the related to the improvement owed to the contractor by the owner. contractor by the owner.

Contractor’s Trust IContractor’s Trust Is. 8(1) – “Amounts Owing or s. 8(1) – “Amounts Owing or

Received”Received”8.--(1) 8.--(1) All amountsAll amounts,,(a) (a) owingowing to a contractor or subcontractor, to a contractor or subcontractor, whether or not due or payable; orwhether or not due or payable; or(b) (b) receivedreceived by a contractor or by a contractor or subcontractor, on account of the contract subcontractor, on account of the contract or subcontract price of an improvement or subcontract price of an improvement constitute a trust fund for the benefit of constitute a trust fund for the benefit of the subcontractorsthe subcontractors and other persons who and other persons who have supplied services or materials to the have supplied services or materials to the improvement who are owed amounts by improvement who are owed amounts by the contractor or subcontractor. the contractor or subcontractor.

Contractor’s Trust IIContractor’s Trust IIs. 8(2) – “Prohibition”s. 8(2) – “Prohibition”

(2) The contractor or subcontractor is the (2) The contractor or subcontractor is the trustee of the trust fund created by trustee of the trust fund created by subsection (1) subsection (1) and the contractor or subcontractor shall not and the contractor or subcontractor shall not appropriate or convert any part of the fund to appropriate or convert any part of the fund to the contractor's or subcontractor's own use the contractor's or subcontractor's own use or to any use inconsistent with the trust or to any use inconsistent with the trust until all subcontractors and other persons until all subcontractors and other persons who supply services or materials to the who supply services or materials to the improvement are paid all amounts related to improvement are paid all amounts related to the improvement owed to them by the the improvement owed to them by the contractor or subcontractor.contractor or subcontractor.

Vendor’s Trust IVendor’s Trust Is. 9(1) – “The Trust Fund”s. 9(1) – “The Trust Fund”Where the owner's interest in a premises Where the owner's interest in a premises is sold by the owner, is sold by the owner, an amount equal to, an amount equal to, (a) the (a) the value of the considerationvalue of the consideration received received by the owner as a result of the sale, by the owner as a result of the sale, lessless, , (b) the (b) the reasonable expenses arising from reasonable expenses arising from the salethe sale and the amount, if any, paid by and the amount, if any, paid by the vendor to discharge any existing the vendor to discharge any existing mortgage indebtedness on the premises,mortgage indebtedness on the premises,constitutes a trust fund for the benefit of constitutes a trust fund for the benefit of the contractorthe contractor. .

Vendor’s Trust IIVendor’s Trust IIs. 9(2) – “Prohibition”s. 9(2) – “Prohibition”

(2) The former owner is the trustee of (2) The former owner is the trustee of the trust created by subsection (1), the trust created by subsection (1),

and shall not appropriate or convert and shall not appropriate or convert any part of the trust property to the any part of the trust property to the former owner's own use or to any use former owner's own use or to any use inconsistent with the trust inconsistent with the trust

until the contractor is paid all until the contractor is paid all amounts owed to the contractor that amounts owed to the contractor that relate to the improvement. relate to the improvement.

DefensesDefenses

Defense IDefense I“But, I Paid My Beneficiaries”“But, I Paid My Beneficiaries”s. 10 - Discharge of the Trust s. 10 - Discharge of the Trust

ObligationsObligationsSubject to Part IV (holdbacks)Subject to Part IV (holdbacks),,every paymentevery payment by a trustee by a trustee to a person to a person the trustee is liable to paythe trustee is liable to pay for services or for services or materials supplied to the improvement materials supplied to the improvement discharges the trust of the trustee discharges the trust of the trustee making the paymentmaking the payment and the trustee's and the trustee's obligations and liability as trustee obligations and liability as trustee to all to all beneficiariesbeneficiaries of the trust of the trustto the extent of the paymentto the extent of the payment made by the made by the trustee. trustee.

Defense IIDefense II“But, I Borrowed to Pay My “But, I Borrowed to Pay My

Beneficiaries”Beneficiaries”s. 11 – Repayment of Money Used s. 11 – Repayment of Money Used

or Borrowedor Borrowed(1) Subject to Part IV, (1) Subject to Part IV, a trustee a trustee who pays in whole or in partwho pays in whole or in part for the for the supply of services or materials to an improvement supply of services or materials to an improvement out of out of money that is not subject to a trustmoney that is not subject to a trust under under this Part this Part may may retainretain from trust funds an amount equal to from trust funds an amount equal to that paid by the trustee without being in breach of that paid by the trustee without being in breach of the trust. the trust. (2) Subject to Part IV, (2) Subject to Part IV, where a trustee where a trustee pays in whole or in partpays in whole or in part for the for the supply of services or materials to an improvement supply of services or materials to an improvement out of out of money that is loaned to the trusteemoney that is loaned to the trustee, , trust funds trust funds may be applied to discharge the loanmay be applied to discharge the loan to the extent that the lender's money was so used to the extent that the lender's money was so used by the trustee, and the  application of trust money by the trustee, and the  application of trust money does not constitute a breach of the trust. does not constitute a breach of the trust.

Defense IIIDefense III“But, “But, HeHe Owes Owes MeMe Money” Money”

Section 12 – Retaining Trust Section 12 – Retaining Trust FundsFunds

Subject to Part IV, Subject to Part IV,

a trustee may, without being in breach of a trustee may, without being in breach of trust, trust, retain from trust fundsretain from trust funds

an amount that, as between the trustee an amount that, as between the trustee and the person the trustee is liable to pay and the person the trustee is liable to pay under a contract or subcontract related to under a contract or subcontract related to the improvement, is the improvement, is equal to the balance in equal to the balance in the trustee's favour of all outstanding the trustee's favour of all outstanding debts, claims or damages, debts, claims or damages,

whether or not related to the improvementwhether or not related to the improvement. .

EnforcementEnforcement

Enforcement I Enforcement I “The Hammer”“The Hammer”

s. 13(1) – Deemed Breach of s. 13(1) – Deemed Breach of TrustTrust

In addition to the persons who are otherwise liable

in an action for breach of trust under this Part, (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.

Enforcement II Enforcement II “The Sickle”“The Sickle”

s. 13 (2) – “Question of s. 13 (2) – “Question of Fact”Fact”

The question of whether a person The question of whether a person has effective control of a corporation has effective control of a corporation or its relevant activities is one of fact or its relevant activities is one of fact

and in determining this the court and in determining this the court may disregard the form of any may disregard the form of any transaction and the separate transaction and the separate corporate existence of any corporate existence of any participantparticipant. .

Enforcement IIIEnforcement III(As if I & II Weren’t Bad Enough)(As if I & II Weren’t Bad Enough)

Section 336 Criminal CodeSection 336 Criminal Code

Every one who, being a trusteeEvery one who, being a trustee of anything of anything for the use or benefit, whether in whole or in for the use or benefit, whether in whole or in part, of another person, or for a public or part, of another person, or for a public or charitable purpose, charitable purpose,

converts, with intent to defraud and in converts, with intent to defraud and in contravention of his trustcontravention of his trust, that thing or any , that thing or any part of it to a use that is not authorized by part of it to a use that is not authorized by the trust the trust

is is guilty of an indictable offence and liable to guilty of an indictable offence and liable to imprisonment for a term not exceeding imprisonment for a term not exceeding fourteen yearsfourteen years. .

Case in PointCase in Point

Structural Contractors Ltd. v. Structural Contractors Ltd. v. Westcola Holdings Inc.Westcola Holdings Inc. (2000), (2000), 48 O.R. (3d) 417 (Ont. C.A.)48 O.R. (3d) 417 (Ont. C.A.)

FactsFacts

Westcola owned office building in TorontoWestcola owned office building in Toronto Largest tenant (government) occupied 75% Largest tenant (government) occupied 75%

of buildingof building Westcola retained Structural to renovate Westcola retained Structural to renovate

underground parking garageunderground parking garage Payments from Westcola to Structural were Payments from Westcola to Structural were

to be certified by payment certifierto be certified by payment certifier Contract price doubled as work progressedContract price doubled as work progressed

Facts (continued)Facts (continued) Government lease ran outGovernment lease ran out Government chose not renew because of Government chose not renew because of

ongoing ocnstructionongoing ocnstruction Owner’s cash flow stoppedOwner’s cash flow stopped Owner used rent payments from government Owner used rent payments from government

exclusively to service mortgage debt, utility exclusively to service mortgage debt, utility bills, maintenance costs, insurance and bills, maintenance costs, insurance and property taxesproperty taxes

No personal benefit to landlord whatsoeverNo personal benefit to landlord whatsoever Engineers certified substantial completionEngineers certified substantial completion Unpaid contractor sued owner of company Unpaid contractor sued owner of company

personally personally

Stopping There:Stopping There:

Q: Did the Owner Do Anything Q: Did the Owner Do Anything Wrong?Wrong?

A: YesA: Yes

Landlord’s ArgumentsLandlord’s Arguments

It cannot be breach of trust merely It cannot be breach of trust merely to service mortgage and pay to service mortgage and pay utilities, because without doing so, utilities, because without doing so, there would be no rentsthere would be no rents

It would be grossly unfair to find the It would be grossly unfair to find the owner personally liable in such a owner personally liable in such a case, because nobody could have case, because nobody could have foreseen such liabilityforeseen such liability

Court of Appeal’s Court of Appeal’s Response:Response:

Rents became trust funds to the Rents became trust funds to the extent of certified but unpaid funds extent of certified but unpaid funds due to Structuraldue to Structural

Owner is personally liable for these Owner is personally liable for these trust fundstrust funds

Landlord’s attempt to draw distinction Landlord’s attempt to draw distinction between s. 7 (owner’s trust) and s. 8 between s. 7 (owner’s trust) and s. 8 (contractor’s trust) cannot prevail (contractor’s trust) cannot prevail given the language of s. 7(4)given the language of s. 7(4)

III. Who Can III. Who Can Make a Trust Make a Trust

Claim?Claim?

BasicsBasics Beneficiaries of owner’s trust:Beneficiaries of owner’s trust: The class of contractors having privity of The class of contractors having privity of

contract with the owner.contract with the owner.Beneficiaries of contractor’s trust:Beneficiaries of contractor’s trust:

Subcontractors having privity of contract with Subcontractors having privity of contract with the contractor and those that have privity of the contractor and those that have privity of contract with subcontractors who have proven contract with subcontractors who have proven claims to the fund.claims to the fund.

Trust rights under the Act are not conditional Trust rights under the Act are not conditional upon the existence of an enforceable lien upon the existence of an enforceable lien ((Minneapolis-Honeywell Regulator Co. v. Minneapolis-Honeywell Regulator Co. v. Empire Brass Co.Empire Brass Co., [1955] S.C.R. 694)., [1955] S.C.R. 694).

IV. Practical IV. Practical Strategies for Strategies for

Ensuring that You Ensuring that You Do Not Breach the Do Not Breach the

Trust RulesTrust Rules

The New York ModelThe New York Model

New York Lien Law expressly provides New York Lien Law expressly provides for a method of keeping books and for a method of keeping books and records relating to trust fundsrecords relating to trust funds

This provides a defendant with at least This provides a defendant with at least a a prima facieprima facie defence to a breach of defence to a breach of trust actiontrust action

Summary judgments as seen in Summary judgments as seen in Westcola would be impossible if Westcola would be impossible if practices were adoptedpractices were adopted

Highlights of the New York Highlights of the New York ModelModel

1. Some overheads are permissible, such as 1. Some overheads are permissible, such as payroll taxes, unemployment insurance payroll taxes, unemployment insurance premiums, wage supplements, surety bond premiums, wage supplements, surety bond premiums.premiums.

2. Books and records shall include2. Books and records shall include

(a) detailed accounting of trust assets receivable (a) detailed accounting of trust assets receivable (names, addresses, amounts, dates)(names, addresses, amounts, dates)

(b) detailed accounting of trust accounts payable(b) detailed accounting of trust accounts payable

(c) detailed accounting of trust accounts received(c) detailed accounting of trust accounts received

(d) detailed accounting of trust accounts made(d) detailed accounting of trust accounts made

Highlights of the New York Highlights of the New York ModelModel

3. Create legal presumptions 3. Create legal presumptions (a) if accounting not followed: (a) if accounting not followed: presumed breach of trustpresumed breach of trust

(b) if accounting followed: presumed (b) if accounting followed: presumed defence to action for breach of trust defence to action for breach of trust (i.e. no summary judgment)(i.e. no summary judgment)