Robert Nicholson Construction Company Limited v. Edgecon Construction Inc., 2016 ONSC 3107

CITATION: Robert Nicholson Construction Company Limited v. Edgecon Construction Inc., 2016 ONSC 3107

DIVISIONAL COURT FILE NO.: 11-15

DATE: 20160517

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

H. SACHS, C. HORKINS and L.A. PATTILLO JJ.

BETWEEN:

THE ROBERT NICHOLSON CONSTRUCTION COMPANY LIMITED

Plaintiff/Respondent

– and –

EDGECON CONSTRUCTION INC., RLC STRATFORD LP and PALSTRATFORD GROUP INC.

Defendants (RLC Stratford LP and Palstratford Group Inc. as Appellants)

Christopher Staples, for the Defendants RLC Stratford LP and Palstratford GP Inc., Appellants

Martha Cook, for the Plaintiff/ Respondent

HEARD at London: April 22, 2016

H. Sachs J.:

1The Appellants on this appeal are the owners of a construction project (the “Project”). The other named defendant (Edgecon Construction Inc.) is one of the companies that the owners dealt with as their general contractor. The Respondent was a subcontractor on the Project who was not fully paid by Edgecon for the services and materials it had delivered to the project.

2During the course of construction, the Appellants, at the request and direction of Edgecon, wired a total of approximately $1.3 million to a bank account in the name of 1809313 Ontario Limited (“180”), a company related to Edgecon who appears to have acted as construction manager on the Project.

3The Respondent was not paid for its work and initially obtained a default judgment against the general contractors in the amount of $141,089.48, which it has been unable to collect. Garnishments were filed pursuant to these judgments, but no monies have been paid pursuant to the garnishment orders.

4The Respondent commenced an action against the Appellant owners, alleging that they breached their statutory trust obligations under Part II of the Construction Lien Act, R.S.O. 1990, c. C.30 (as amended) (the “Act”). On February 18, 2015, King J. granted summary judgment against the Appellant owners, finding that they had breached their statutory trust obligations under the Act, because, at the request of the general contractors, the Appellants had made their payments under the contract to 180. The motion judge also granted judgment against the Appellants’ officers and directors.

5The motion judge made an alternative order that the Appellants pay the full amount they had paid to 180 (over $1,300,000) to the defendant general contractor (who was not seeking any relief on the summary judgment motion), which would then allow the Respondent to satisfy the garnishment orders it had obtained against the general contractors.

6The Appellants appeal all aspects of the motion judge’s order, arguing that the motion judge erred in law when he found that the Respondent subcontractor could be a beneficiary of the trust imposed by the Act in favour of the general contractors; he erred in law when he found that he had jurisdiction to grant judgment against the officers and directors of the Appellants (who had never been named as parties to the action and against whom no claim had been made in the action) and he erred in law when he made his order for alternative relief in the absence of a claim by the general contractors against the Appellant owners and in the absence of any evidence that there was a debt owing from the Appellant owners to the general contractors.

7On this appeal, the Respondent correctly concedes that the motion judge erred in law in granting all aspects of the relief he granted.

8In other words, the Respondent concedes that the motion judge erred in law when he found that a subcontractor could be a beneficiary of the statutory trust fund created under s. 7(1) of the Act, as the wording of that section is clear; the owner’s trust fund exists “for the benefit of the contractor”. Under s. 8 of the Act, a separate and distinct trust obligation is imposed on contractors and subcontractors, the beneficiaries of which are other subcontractors (Colautti Construction Ltd. V. Ashcroft Developments Inc. et al, 2011 ONCA 359 (C.A.) at para. 73).

9The Respondent also concedes that the motion judge had no jurisdiction to find liability on the part of the Appellants’ officers and directors and had no basis for ordering the alternative relief that he did.

10However, the Respondent submits that there is another basis for judgment to be granted against the Appellants, namely s. 13 of the Act. Section 13 of the Act provides as follows:

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 breach of trust.

11In order to establish liability under s. 13, the Respondent must establish that the Appellant owners had effective control of the general contractors or its relevant activities. According to the Respondent, since that Appellants had control over sending the general contractors the money they were entitled to, the Appellants had effective control of one of the general contractors’ “relevant activities”. As put by the Respondent, since the Appellants “held the purse strings”, they had “effective control”.

12In support of its argument, the Respondent relied on a number of cases where liability was imposed under s. 13.

13In Cogemar Srl. Marble & Granite v. Stone Top Factory Inc., 2003 CarswellOnt 1437 (S.C.), personal liability was imposed under s. 13 on a person who was found to be a de facto officer of a corporation and was found to have had de facto effective control of the corporation’s activities in relation to the construction project giving rise to the claim. There is no suggestion in this case that the Appellant owners were signing officers of the general contractors or had de facto effective control of the general contractors’ activities in relation to the construction project.

14In Sunview Doors Limited v. Pappas (2010), 2010 ONCA 198, 101 O.R. (3d) 285 (C.A.), the plaintiff had supplied products to the defendant for use in a construction project. Personal liability was imposed on an employee of the defendant who handled the company’s accounts. However, the evidence in that case went much further than the handling of the company’s accounts. The employee was found to have had effective control of the defendant or its activities because she was a sister of the owner and had an active role in the management of the company such that she was able to have the defendant pay her between $150,000 and $195,000 over her salary in a short period of time. There is no evidence of any such connection between the Appellants and the general contractors in the case at bar.

15In Don Park Inc. v. S.E. Mechanical Engineering Ltd., 1997 CarswellOnt 5380 (Gen. Div.), aff’d, 1998 CarswellOnt 4718 (C.A.), the plaintiff supplied materials to the defendant, S.E. Mechanical Engineering, who, in turn, gave those materials to the defendant, Mersin Inc., a company that shared premises with S.E. Mechanical. The sole shareholder of Mersin was the son of the sole shareholders and directors of S.E. Mechanical. Mersin paid S.E. Mechanical for the materials the plaintiff had supplied, but S.E. Mechanical failed to pay the plaintiff. Personal liability for the plaintiff’s claim was imposed on the sole shareholder of Mersin. However, in that case, the two companies were owned by members of the same family, and the Mersin shareholder was found to have known of the plaintiff’s claim and to have committed acts that the trial judge found to be fraudulent and dishonest. No such evidence exists in the case at bar.

16In this case, the only connection between the Appellant owners and the general contractors is that they paid the general contractors’ invoices. There is no suggestion that they knew of the Respondent’s claim or that they knowingly participated in any scheme to defeat that claim. Thus, the question becomes whether sending money to pay the invoices of a general contractor is enough to create a situation where the owner has sufficient control over the activities of the general contractor that he or she can be exposed to liability under s. 13.

17To allow this argument to succeed would mean that every owner is potentially liable under this section. Furthermore, in construction projects that are financed by lending institutions, the payments to general contractors can come directly from those lending institutions. According to the Respondent’s argument, those lending institutions could also be exposed to liability under s. 13.

18It would be an absurd reading of the Act to find that someone who makes payments to a corporation has control over one of the payee corporation’s “relevant activities”, for the purpose of meeting the first precondition for liability under s. 13.

19For these reasons, the Appellants’ appeal is allowed, the judgment below is set aside and an order will go dismissing the Respondent’s claim against the Appellants. As agreed by the parties, the Appellants, as the successful parties, are entitled to their costs of this appeal and the proceeding below, fixed in the amount of $15,000, all inclusive.