Structural Contractors Ltd. v. Westcola Holdings Inc. et al. [Indexed as: Structural Contractors Ltd. v. Westcola Holdings Inc.]
48 O.R. (3d) 417
[2000] O.J. No. 2131
No. C32949
Court of Appeal for Ontario
Austin, Moldaver and Borins JJ.A.
June 12, 2000
*Applicatin for leave to appeal to the Supreme Court of Canada was dismissed with costs March 8, 2001 (Gonthier, Major and Binnie JJ.). S.C.C. File No. 28118. S.C.C. Bulletin, 2001, p. 458.
Construction liens -- Trust fund -- Breach of trust -- Contractor unpaid for renovation of parking garage of commercial rental property -- Landlord receiving rents after certification of substantial performance -- Landlord using rent funds to pay general expenses of commercial premises -- Landlord breaching trust provisions of the Construction Lien Act -- Construction Lien Act, R.S.O. 1990, c. C.30, ss. 7-13.
Construction liens -- Trust fund -- Breach of trust -- Liability of director, officer or person with effective control of corporation that is subject to trust obligation under Construction Lien Act -- Contractor unpaid for renovation of parking garage of commercial rental property -- Landlord receiving rents after certification of substantial performance -- Landlord using rent funds to pay general expenses of commercial premises -- Landlord breaching trust provisions of the Construction Lien Act -- Director liable for breach of trust if he or she knew or ought to have known of breach of trust -- Breach of trust not excused by provisions of Trustee Act -- Construction Lien Act, R.S.O. 1990, c. C.30, ss. 7-13 -- Trustee Act, R.S.O. 1990, c. T.23, s. 35.
In April 1997, WH Inc., the owner of a commercial building in Toronto, hired SC Ltd. to renovate the underground parking garage of the building for $215,000. The work was completed, and approximately $90,000 remained unpaid. A certificate of substantial completion under the Construction Lien Act was published on October 23, 1997. After the certification, WH Inc. received rents from its tenants and the rents were used to pay the operating expenses for the building, including heat, hydro, janitorial, maintenance, property taxes, goods and services, taxes and mortgage payments. SC Ltd. sued for the balance owing to it and moved for summary judgment. WH Inc. admitted liability in contract and Pitt J. found it liable for breach of the trust provisions of the Construction Lien Act. Pitt J. also found C, who was the sole officer, director, controlling mind, and signing officer of WH Inc., liable for breach of trust. WH Inc. and C appealed.
Held, the appeal should be dismissed with costs.
When a contractor working on a commercial property is unpaid, rents received by the landlord are trust funds under the Construction Lien Act and remain so until the contractor is paid. Subject to the reductions found in ss. 9 to 12 of the Act, the strictures of the trust apply to any and all money coming into the hands of the owner, up to the amount owing to the contractor. No justification was advanced to exclude a commercial landlord from the operation of the trust provisions of the Act. C was also personally liable for breach of trust. Liability may be imposed on a person who knew or reasonably ought to have known of the breach of trust. Whether or not he knew, since he had effective control of the activities of WH Inc., it was beyond doubt that he reasonably ought to have known of the breach of trust. Nor did he have a defence based on s. 35 of the Trustee Act, under which a trustee may be excused from a breach of trust if he or she acted honestly and reasonably. Assuming that he act ed honestly, it could not be said that he acted reasonably and the s. 35 defence was not available to him. Accordingly, the appeal should be dismissed.
APPEAL from a judgment awarding damages for breach of the trust provisions of the Construction Lien Act, R.S.O. 1990, c. C.30.
Cases referred to Dietrich Steel Ltd. v. Shar-Dee Towers (1987) Ltd. (1999), 1999 2757 (ON CA), 42 O.R. (3d) 749, 170 D.L.R. (4th) 475, 45 C.L.R. (2d) 178 (C.A.); Rudco Insulation Ltd. v. Toronto Sanitary Inc. (1998), 1998 5529 (ON CA), 42 O.R (3d) 292, 167 D.L.R. (4th) 121, 41 C.L.R. (2d) 1 (C.A.); Tam-Kal v. Stock Mechanical Inc. (1998), 43 C.L.R. (2d) 94 (Ont. Gen. Div.), affd [1999] O.J. No. 4371 (C.A.) Statutes referred to Construction Lien Act, R.S.O. 1990, c. C.30, ss. 7-13, 66 Courts of Justice Act, R.S.O. 1990, c. C.43, s. 128 Trustee Act, R.S.O. 1990, c. T.23, c. 35
Duncan W. Glaholt, for appellants. Gregory N. Hemsworth, for respondent.
The judgment of the court was delivered by
Introduction
1AUSTIN J.A.: -- This appeal considers whether rents received by a commercial landlord are trust funds and remain so by reason of s. 7(2) and (3) of the Construction Lien Act, R.S.O. 1990, c. C.30 ("the Act") until a contractor working on the property is paid.
Background
2Westcola Holdings Inc. ("Westcola") is a commercial landlord. It owns a commercial building in Toronto and leases parts of it to various tenants. Frank Colatosti ("Colatosti") is the sole principal of Westcola.
3Structural Contracting Limited ("Structural") is a construction company. In April 1997 Structural contracted with Westcola to renovate the underground parking garage of Westcola's building. The final price agreed upon was $215,000.
4The work was completed by September 29, 1997. The contract provided that the progress of the work was to be certified by Westcola's consultant Trow Consulting Engineers Ltd. ("Trow"). Trow certified substantial completion of the work on October 23, 1997 and published the Certificate of Substantial Completion on October 28, 1997.
5Westcola did not undertake any financing specifically for the work contracted. Instead, in so far as it made payments to Structural, they were paid out of general revenue. Approximately $90,000 remained unpaid and Structural commenced this action to recover that money.
6After the certification of substantial completion, Westcola received rents on a regular basis from the tenants of the building. These were deposited in Westcola's bank account. From that account, payments were made with respect to various services and expenses necessary for the continued operation of the building. These included heat, hydro, janitorial, maintenance, property taxes, goods and services tax and mortgage payments. The total amount of the payments exceeds the amount claimed by Structural.
7Following the production of documents and the examination for discovery of Colatosti, Structural moved for summary judgment. Westcola admitted liability on the basis of the contract. On September 1, 1999, Pitt J. found both defendants liable on the basis of breach of trust. That basis is reflected in the formal judgment; the admitted liability of Westcola in contract is not so reflected in the formal judgment. To that extent, the formal judgment is deficient although no claim to correct it was raised by Structural on this appeal.
8Both defendants purport to appeal against the judgment as pronounced. Westcola's appeal is moot in the sense that whatever might happen on its appeal, it should remain liable in contract. It is not moot in the sense that by reason of the opening words of s. 13(1) of the Act, Colatosti's liability in trust is dependent upon Westcola first being found liable for breach of trust under s. 7(3). Accordingly, it is necessary to deal with the liability of both Westcola and Colatosti in considering Colatosti's appeal.
Statutory Provisions
9The claim for damages for breach of trust is based upon the Act, ss. 7 and 13. Those provisions as are follows:
7(1) All amounts received by an owner, other than the Crown or a municipality, that are to be used in the financing of the improvement, including any amount that is to be used in the payment of the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and prior encumbrances, a trust fund for the benefit of the contractor.
(2) Where amounts become payable under a contract to a contractor by the owner on a certificate of a payment certifier, an amount that is equal to an amount so certified that is in the owner's hands or received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor.
(3) Where the substantial performance of a contract has been certified, or has been declared by the court, an amount that is equal to the unpaid price of the substantially performed portion of the contract that is in the owner's hands or is received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor.
(4) The owner is the trustee of the trust fund created by subsection (1), (2) or (3), and the owner shall not appropriate or convert any part of a fund to the owner's own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to the contractor by the owner.
13(1) 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.
(2) The question of whether a person has effective control of a corporation or its relevant activities is one of fact and in determining this the court may disregard the form of any transaction and the separate corporate existence of any participant.
(3) Where more than one person is found liable or has admitted liability for a particular breach of trust under this Part, those persons are jointly and severally liable.
(4) A person who is found liable, or who has admitted liability, for a particular breach of a trust under this Part is entitled to recover contribution from any other person also liable for the breach in such amount as will result in equal contribution by all parties liable for the breach unless the court considers such apportionment would not be fair and, in that case, the court may direct such contribution or indemnity as the court considers appropriate in the circumstances.
(Emphasis added)
Positions of the Parties
10Structural's position is straightforward and simple and may be stated as follows:
(a) Part II of the Act creates trusts designed to protect persons engaged in the construction industry. Specifically, s. 7 creates trusts binding the owner and s. 8 creates trusts binding the contractor.
(b) In this case s. 7(3) and (4) apply.
(c) Rents and other money in excess of $90,000 came into Westcola's hands after the certification of substantial completion and was paid out without Structural being paid in full.
(d) The moneys paid to Westcola were impressed with a trust by reason of the non-payment of Structural when money was due to it.
(e) The only beneficiary of the trust was Structural.
(f) When Westcola paid the trust money out to anyone other than Structural, contrary to s. 7(4), it breached the trust and is thus liable to Structural for the full amount of its claim.
(g) Colatosti is also liable for breach of the trust by reason of the application of s. 13 and by reason of the fact that he is the sole officer, director, signing officer and controlling mind of Westcola and the person who signed all the cheques by which funds were paid out of the corporation.
11Colatosti raised three defences:
(a) Section 7(3) of the Act does not apply to money received as rent and paid out for overhead expenses and mortgages;
(b) In order for s. 13 to apply, it must be shown in evidence that Colatosti assented to or acquiesced in conduct that he knew or reasonably ought to have known amounted to a breach of trust. Only a trial can establish this knowledge.
(c) Section 35 of the Trustee Act, R.S.O. 1990, c. T.23 provides relief for persons such as Colatosti in these circumstances.
Analysis
12In my respectful opinion, none of these defences is applicable to the facts of this case.
A.
A. Application of Section 7(3) to Rents
13The first defence requires the interpretation of s. 7(3). In oral argument counsel for Colatosti advanced a proposition even broader than as set out in para. 11(a) [above] of these reasons. Counsel's position was that in order for there to be any business at all, the trust in s. 7(3) had to be limited to the amount of the profit in the owner's hands. The owner was free to pay, and would have to pay, in order to keep the business functioning, heat, light, gas, other utilities, municipal taxes and mortgage expenses. If he did not, the business would fail and no one would be paid. Counsel was candid in admitting that there was no jurisprudence which directly supported his proposition; there simply were no cases on this issue.
14Counsel went on to raise obvious difficulties. What about tenants' rent deposits? What if the owner had a cheque in the mail en route to a mortgagee when the certificate of a certifier was received? What is the owner to do, stop payment on the cheque to the mortgagee? It was not suggested that any of these specific situations actually existed in the instant case. They were just illustrations of the problems that would inevitably arise if s. 7(3) were to be interpreted as decided by Pitt J.
15It is therefore not necessary to deal with these questions as there is no evidentiary support for them in the instant case. It may be the case, however, that tenants' deposits are subject to a separate trust and, therefore, not available to Structural. Section 66 of the Act provides ready access to the court for directions in such circumstances. It provides as follows:
- Where a person is in possession of an amount that may be subject to a trust under Part II, the person may apply to the court for direction and the court may give any direction or make any order that the court considers appropriate in the circumstances.
No application was brought by either Westcola or Colatosti for directions.
16In so far as mortgage payments are concerned, mortgagees have their own remedies, as do mortgagors. The concern in this appeal is not the protection of mortgagees, but the protection of contractors and subcontractors.
17The Act provides no support for the argument of the owner. Section 7(3) deals with cases where substantial performance is certified. That is the instant case. The subsection provides that "an amount that is equal to the unpaid price . . . that . . . is received by the owner . . . constitutes a trust fund for the benefit of the contractor". Section 7(2) provides for cases where amounts become payable by an owner to a contractor by virtue of certificates; the relevant language is identical to that of s. 7(3). Section 7(4) prohibits the use of any such funds by the owner until the contractor has been paid. It may be that some payments coming into the hands of, or paid out of the funds of, an owner such as Westcola are not subject to the trust imposed by s. 7(3). None were drawn to the court's attention in the instant case.
18As noted earlier, s. 8 of the Act deals with circumstances in which a trust is imposed upon a contractor or subcontractor. Sections 9, 10, 11 and 12 set out circumstances in which the amount of trust in either s. 7 or s. 8 may be reduced. Sections 8, 9, 10, 11 and 12 provide as follows:
8(1) All amounts,
(a) owing to a contractor or subcontractor, whether or not due or payable; or
(b) 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.
(2) The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor's or subcontractor's own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor.
9(1) When the owner's interest in a premises is sold by the owner, an amount equal to,
(a) the value of the consideration received by the owner as a result of the sale,
less,
(b) the reasonable expenses arising from the sale and the amount, if any, paid by the vendor to discharge any existing mortgage indebtedness on the premises,
constitues a trust fund for the benefit of the contractor.
(2) The former owner is the trustee of the trust created by subsection (1), and shall not appropriate or convert any part of the trust property to the former owner's use or to any use inconsistent with the trust until the contractor is paid all amounts owed to the contractor that relate to the improvement.
- Subject to Part IV (holdbacks), every payment by a trustee to a person the trustee is liable to pay for services or materials supplied to the improvement discharges the trust of the trustee making the payment and the trustee's obligations and liability as trustee to all beneficiaries of the trust to the extent of the payment made by the trustee.
11(1) Subject to Part IV, a trustee who pays in whole or in part for the supply of services or materials to an improvement out of money that is not subject to a trust under this Part may retain from trust funds an amount equal to that paid by the trustee without being in breach of the trust.
(2) Subject to Part IV, where a trustee pays in whole or in part for the supply of services or materials to an improvement out of money that is loaned to the trustee, trust funds may be applied to discharge the loan to the extent that the lender's money was so used by the trustee, and the application of trust money does not constitute a breach of the trust.
- Subject to Part IV, a trustee may, without being in breach of trust, retain from trust funds an amount that, as between the trustee and the person the trustee is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee's favour of all outstanding debts, claims or damages, whether or not related to the improvement.
19Sections 9, 10, 11 and 12 demonstrate that the legislature considered the question of reducing the amount of a trust fund, but the Act contains no exceptions of the kind suggested by the appellants. The strictures of a trust apply to any and all money coming in to the hands of the owner, up to the amount owing to the contractor, in this case approximately $90,000. As a practical matter, the limitation on the application of s. 7(3) proposed by counsel for the defendants, namely restricting the trust to profits in the hands of the owner, would turn actions to enforce the trust sections of the Act into accounting exercises. Nothing in the Act suggests that that was the intention of the legislature in passing s. 7(3). Indeed, the italicized portion of s. 7(4), which is set out in para. 9 [p. 419 ante], which conforms with ss. 8(2), 9(2) and 11(2) illustrates the contrary.
20The appellant's factum draws a distinction between ss. 7 and 8 of the Act. As noted earlier, s. 8 imposes a trust upon certain funds received by the contractor while s. 7 imposes a trust on the owner. A line of cases has decided that the contractor is not entitled to pay overhead from those funds at the expense of subcontractors: see for example, Rudco Insulation Ltd. v. Toronto Sanitary Inc. (1998), 1998 5529 (ON CA), 42 O.R. (3d) 292, 167 D.L.R. (4th) 121 (C.A.).
21The appellants argue that the same considerations do not apply to s. 7, particularly where the funds are received on account of rent, without which the owner would be unable to provide the services required by its lease obligations. I do not see how this submission can prevail given the language of s. 7(4).
22That argument must be rejected. Westcola is essentially a landlord. Rent is not an incidental matter to it. Rent is its lifeblood, its raison d'être. To exclude rent from the trust in the case of a landlord would be to exclude Westcola from the application of s. 7. No justification has been suggested for such a step.
23The appellant's first defence must therefore fail.
B.
B. Personal Liability under Section 13
24The second defence is raised on behalf of Colatosti only. He relies on s. 13 of the Act. For liability to attach to him, it must be shown in evidence that he assented to or acquiesced in conduct that he knew or reasonably ought to have known amounted to a breach of trust. He argues that those conclusions cannot be drawn by inference and that only a trial can establish the necessary knowledge. I disagree.
25Colatosti swore that he was a licensed real estate broker, that he was not involved in the construction industry, that he was not familiar with the provisions of the Act, that he was not aware of the publication of the Certificate of Substantial Completion and that it never occurred to him, nor was it ever suggested to him, that the rent payments received by the corporation might be viewed as trust funds.
26Although it was a s. 8 case, a similar situation occurred in Tam-Kal v. Stock Mechanical Inc. (1998), 43 C.L.R. (2d) 94 (Ont. Gen. Div.), affirmed [1999] O.J. No. 4371 (C.A.). There the issue was whether one Michael Cannone was personally liable for the breaches of trust. In concluding that he was, Ground J. said at p. 116:
Counsel for Mr. Cannone submitted that the test must be subjective and that there is no evidence before this court that Mr. Cannone actually knew or should have known that certain of the payments made by Stock were not proper trust fund payments. I reject such submission. The test in the statute is disjunctive i.e. "knows or reasonably ought to know". It seems to me that the second wing of the test must necessarily depend upon an objective analysis as to what a reasonable person ought to know in the circumstances. It is particularly significant in our case that Mr. Cannone was the chief executive officer of Stock and presumably the person responsible for making decisions as to payments to suppliers and others. In Andrea Schmidt Construction Ltd. v. Glatt (1979), 1980 1711 (ON CA), 25 O.R. (2d) 567 (Ont. H.C.), Saunders J. stated:
In my opinion, the participation by Burnac was of such a degree as to at least put Burnac on inquiry as to whether there was a breach of trust committed by the diversion. There were circumstances that would indicate to a reasonable person that such a diversion might constitute a breach of trust and if a reasonable inquiry had been made, the failure to pay Schmidt would, in all probability, have been revealed.
And in G.V.B.S. Inc. v. Hydro Guard Inc. (1998), 40 C.L.R. (2d) 272 (Ont. Gen. Div.), Somers J. stated at para. 58:
In my view, it is no defence that if a corporation's conduct constituted a breach of the trust the person sought to be held responsible was apparently acting mistakenly or pursuant to what he believed to be the true situation.
I must conclude that a person in the position of Mr. Cannone with his years of experience in the construction industry and being the chief executive officer of Stock, on any reasonable person test, ought to have known that the payments referred to above, which I have disallowed as payments to trust funds beneficiaries, were improper payments out of trust funds and that accordingly Mr. Cannone has personal liability for breach of trust pursuant to ss. 13(1) of the C.L.A. to the extent of the amount paid by Stock which were improper applications of trust funds.
27In its endorsement dismissing the appeal from Ground J., this court said at para. 16: "In our opinion, Ground J. did not err in his application of this section [s. 13] to the facts of this case."
28As Ground J. pointed out, the test in s. 13(1) of the Act is disjunctive. As a result, one of the tests is "reasonably ought to know". Unlike Michael Cannone, Colatosti was the only person involved. He was the sole officer, director, controlling mind and signing officer of the corporation and the person who signed all of the cheques in question. Whether or not he knew he was committing a breach of trust, it is beyond argument that he reasonably ought to have known as he had effective control of the activities of the corporation. Accordingly, the defence based upon s. 13 of the Act must fail.
C.
29Colatosti's third defence is s. 35 of the Trustee Act. It reads as follows:
- If in any proceeding affecting a trustee or trust property it appears to the court that a trustee, or that any person who may be held to be fiduciarily responsible as a trustee, is or may be personally liable for any breach of trust whenever the transaction alleged or found to be a breach of trust occurred, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach, the court may relieve the trustee either wholly or partly from personal liability for the same.
30In Dietrich Steel Ltd. v. Shar-Dee Towers (1987) Ltd. (1999), 1999 2757 (ON CA), 42 O.R. (3d) 749, 45 C.L.R. (2d) 178 (C.A.), a personal defendant appealed the finding of a trial judge that he was personally liable for the breach of s. 8 of the Act. Before dealing with the question of personal liability, the Court of Appeal had to deal with the liability of the company which had defaulted at trial. In dealing with that issue, the argument was raised whether s. 35 could apply to a breach of a specific statutory trust. McKinlay J.A. speaking for the court said at pp. 758-59 O.R., p. 187 C.L.R.:
Assuming, without deciding the question, that s. 35 could apply to a breach of a specific statutory trust, I have difficulty in seeing how the provisions of s. 35 could apply to give relief to a contractor who becomes a trustee by virtue of the provisions of s. 8 of the Construction Lien Act. The whole purpose of the Act is to protect persons supplying services and materials to an "improvement" to real property, and s. 8(2) sets out specific duties of a trustee. The trustee must not appropriate funds to its own use or to a use inconsistent with the trust until all amounts owed money by the trustee for services or materials supplied to the improvement are paid. If we assume that a trustee passes the test of honesty required by s. 35, I do not see how the trustee could pass the test of reasonableness if it has acted contrary to the specific provisions of s. 8(2). To say that the trustee's actions could be reasonable in such a situation would be to subvert the whole raison d'être of the Act.
31McKinlay J.A. went on to relieve the personal defendant of liability, but applying her words referable to the company to Colatosti, I conclude that s. 35 is simply not available to him. Following the reasoning of McKinlay J.A. and assuming without finding that Colatosti acted honestly, it is beyond argument that he did not act reasonably. Nor can what happened here be described as a "technical breach of trust". No evidence has been tendered to suggest that he "ought fairly to be excused for the breach of trust". Fairness in these circumstances raises the question who should bear the loss -- Colatosti or Structural? There can be only one answer to that question.
Pre-judgment Interest
32None of the defences raised can succeed. Colatosti raised, in addition, a question respecting the rate of pre- judgment interest awarded against him. The contract between Structural and Westcola specified interest at the rate of 15 per cent per annum on overdue payments. The trial judge awarded this amount as against both Westcola and Colatosti. The latter argues that he was not a party to the contract and that if judgment is to be awarded against him, it is not for breach of contract and accordingly the rate should be that specified by the Courts of Justice Act, R.S.O. 1990, c. C.43, s. 128. I agree and para. 1 of the judgment should be varied to reflect that the prejudgment rate of interest awarded against Westcola is 15 per cent and, as against Colatosti, is to be calculated according to the Courts of Justice Act. If counsel are unable to agree on this rate, it may be addressed by correspondence to the court.
Disposition
33In all other respects, I would dismiss the appeal with costs.
Appeal dismissed.
