Caught up in the moment of construction work chaos and scrambling to complete jobs, it is all too easy for invoices to accrue and accounts to build up. While construction liens provide one way to secure payment due to contractors and subcontractors, preventing one's lien rights from expiring requires meeting strict deadlines, which are often missed.

Construction Trusts

The Construction Lien Act creates a scheme for statutory trusts which exist for the benefit of contractors and subcontractors.

All amounts received by an owner, other than the Crown or a municipality, that are to be used in financing a project constitute a trust fund for the benefit of contractors.

Similarly, all amounts owing to a contractor or subcontractor, whether or not due or payable, or received by a contractor or subcontractor, on account of the contract or sub-contract 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.

Owners and contractors who hold funds in trust can only apply those funds for purposes consistent with the trust. Otherwise, the corporation or person who is the trustee along with the officers and directors of a corporate trustee, and any person "who has effective control of a corporation or its relevant activities" which could include employees or agents of the corporation, may be held personally liable. This can often make a difference from a recovery perspective, especially if payer is a corporation, and the corporation is insolvent.

According to St. Mary's Cement Corp. v Construc Ltd., the following elements must be proven to establish the existence of a trust:

  1. The plaintiff who is owed did supply services or materials:

This can be established by oral testimony or substantiated through documentation including invoices, communication confirming services and materials provided (ie. By e-mail, text, etc), account statements, etc.

  1. The project is considered an "improvement" pursuant to the Construction Lien Act:

According to section 1(1) of the Act, an "improvement" means, in respect of any land

(a) any alteration, addition or repair to the land,

(b) any construction, erection or installation on the land, including the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land, building, structure or works, or

(c) the complete or partial demolition or removal of any building, structure or works on the land

The contractor would have to describe its role in the project, the work it was hired to complete, the work that was in fact completed, and how it fits under one of the three categories above.

  1. The plaintiff is owed monies on the project
  1. The defendant(s) received money for the improvement:

The plaintiff would need to demonstrate that the defendant(s) – be it the owner of the property, the general contractor, or a higher-up sub-contractor – has received funds for work completed.

This information may be obtained by way of a request for information under section 39 of the Act.

While construction trust claims may be a useful tool for contractors and subcontractors who are seeking to collect on unpaid accounts, the flipside of this is that owners, contractors, and sub-contractors who are trustees need to be cautious in order to avoid exposure. In addition to keeping proper records, trustees should keep trust funds separate from their general accounts. When trust funds for the project are mixed with other funding and expenses in one general bank account, it is much more difficult for a trustee to account for the trust funds and as a result the trustee is more likely to become exposed.

For more information or any other questions regarding construction trusts, please contact our lawyers at http://www.devrylaw.ca/construction-liens/.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.