Central Supply Company (1972) Limited v. Modern Tile Supply Company Limited et al.

[Indexed as: Central Supply Co. (1972) Ltd. v. Modern Tile Supply Co. Ltd.]

55 O.R. (3d) 783

[2001] O.J. No. 3575

Docket No. C31196

Ontario Superior Court of Justice

Abella, Laskin and Rosenberg JJ.A.

September 5, 2001

Construction liens -- Trust claim -- Supplier must intend that material sold be used for purposes of known and identified improvement before lien or trust claim arises -- Supplier selling material without any regard to purpose or site for which material is destined -- Supplier deemed to be selling on credit of buyer alone, without access to lien or trust remedies under Act -- Construction Lien Act, R.S.O. 1990, c. C.30, ss. 8(1) and 13.

Central Supply Company (1972) Limited ("Central Supply") supplied floor and wall coverings to Modern Tile Supply Company ("Modern Tile"). Unless it was dealing with contractors, the invoices from Central Supply to Modern Tile did not refer to a specific work site, improvement or premises where the product was to be incorporated. Central Supply was not paid for various goods and it sued. The only issue at the trial was whether Central Supply was entitled to succeed in its claim against the individual defendants, who were principals of Modern Tile, pursuant to the trust provisions of ss. 8(1) and 13 of the Construction Lien Act. This claim was dismissed and Central Supply appealed. (For the purposes of the appeal, the panel of the Court of Appeal was designated a panel of the Divisional Court.)

Held, the appeal should be dismissed with costs.

Under Part III of the Construction Lien Act, which deals with liens, if the supply of services or materials is made without knowledge of or contact with the improvement to which the supply is made, no lien entitlement is created. The trial judge was correct in interpreting the trust provisions of Part II of the Act as having an analogous requirement. Although liens and trusts represent discrete remedies under the Act, the scheme and purpose of the Act argue for a consistent approach. Under s. 8(1), a trust arises for the benefit of those who have supplied services or materials "to an improvement" and, under ss. 14(1) and 15, before a lien arises, there must be services or materials supplied "to an improvement." The similarity in wording in these sections supported a consistent requirement. Therefore, the Act requires that a supplier must intend that the material sold be used for the purposes of a known and identified improvement before a lien or a trust arises. When the supplier is selling material or services without any regard to the purpose or site for which the material is destined, it is deemed to be selling on the credit of the buyer alone, without access to the lien or trust remedies under the Act. Applying these principles to the facts of the immediate case, the trial judge was correct in dismissing the trust claim. Central Supply failed to establish the crucial link that the material was used on a particular improvement.

APPEAL from a judgment dismissing a claim pursuant to ss. 8(1) and 13 of the Construction Lien Act, R.S.O. 1990, c. C.30.

Cases referred to Maple Leaf Homes & Cottages Inc. v. Zoellner Windows (1982) Ltd. (1989), 34 C.L.R. 6 (Ont. H.C.J.); Richmond Bros. Insulation Inc., Re (1989), 1989 CanLII 4103 (ON SC), 69 O.R. (2d) 22, 73 C.B.R. (N.S.) 284 (S.C. Bkcy.); Schulz Concrete Pipe Ltd., Re (1979), 32 C.B.R. (N.S.) 157 (Ont. S.C.); St. Mary's Cement Corp. v. Construc Ltd. (1997), 1997 CanLII 12114 (ON SC), 32 O.R. (3d) 595, 33 C.L.R. (2d) 234 (Gen. Div.); Villa Verde L.M. Masonry Ltd. v. Pier One Masonry Inc. (2001), 2001 CanLII 7060 (ON CA), 54 O.R. (3d) 76 (C.A.) Statutes referred to Construction Lien Act, R.S.O. 1990, c. C.30, ss. 1(1) "contract", "contractor", improvement", "materials", "owner", "premises", "subcontract", "subcontractor", 1(2), 7, 8, 13, 14, 15 Mechanics' Lien Act, R.S.O. 1980, c. 261, s. 1 "material" Authorities referred to Driedger, E.A., Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983) Kuchar, J.S., "Breach of Trust Actions Under the Construction Lien Act" (1995), 20 C.L.R. (2d) 18 McGuinness, K., "Trust Obligations Under the Construction Lien Act" (1994), 15 C.L.R. (2d) 208 Report of the Attorney General's Advisory Committee on the Draft Construction Lien Act (Toronto: Ministry of the Attorney General (Ont.), 1982) Sullivan, R., Driedger on the Construction of Statutes, 3rd ed. (Toronto: Butterworths, 1994)

John R. Carruthers, for appellants. Fabio M. Soccol, for respondents.

The judgment of the court was delivered by

[1] ABELLA J.A.: -- Modern Tile Supply Company Limited was a small retail store in Niagara Falls which sold floor and wall coverings. An elderly couple, John and Nora Grepley, had operated the store for 40 years. A third partner, Ernesta Beltrame, replaced her husband as a director of Modern Tile when he died in 1987. The "operating mind" was John Grepley but all three individuals performed the tasks involved in running the business.

[2] In 1990, Modern Tile suffered economic losses. These financial problems were exacerbated when the Grepleys were unable to work for a year after a car accident. By 1996, the business losses were so severe that the Grepleys and Ernesta Beltrame took no wages or benefits. The Grepleys estimated that over the course of several years, they advanced almost $100,000 of their own funds to the business, surviving on a pension and financial help from their daughter. By 1997, Modern Tile was insolvent.

[3] Central Supply Company (1972) Limited supplied floor and wall coverings to Modern Tile for almost 40 years and had an excellent relationship with it. Deliveries from Central Supply to Modern Tile were made to the store, not to any of Modern Tile's customers. All of Central Supply's billing was to Modern Tile, but from time to time, Mr. Grepley requested that Central Supply put the name of the customer for whom the goods were intended on the invoice, so that Modern Tile could keep track of all the material that was supplied and match it up with its customer. Unlike when it was dealing with contractors, the invoices from Central Supply to Modern Tile never referred to a specific work site, improvement or premises where the product was ultimately to be incorporated.

[4] When Modern Tile's financial problems resulted in its issuing a considerable number of NSF cheques to Central Supply, a new arrangement was made between Central Supply and Modern Tile, pursuant to which Modern Tile agreed to give Central Supply a certified cheque each time products were delivered. At no time did Central Supply request individual guarantees from the Grepleys or Ms. Beltrame.

[5] At trial, on consent, Modern Tile was ordered to pay Central Supply $42,287.77, representing the value of various goods that the appellant supplied to Modern Tile during 1996 and 1997. The claim against 629763 Ontario Ltd., a company controlled by Mr. Grepley, was abandoned. The only issue at trial was whether Central Supply was entitled to succeed in its claim against the individual defendants pursuant to the trust provisions of ss. 8(1) and 13 of the Construction Lien Act, R.S.O. 1990, c. C.30. The trial judge dismissed the claim. This is an appeal by Central Supply from that decision.

[6] The issue on appeal is whether moneys received by Modern Tile, from the retail sale of its product to members of the public, constitute trust funds pursuant to the provisions of the Act. If so, the related issue is whether personal liability should attach to the defendants John and Nora Grepley and Ernesta Beltrame.

[7] After the appeal was argued, the panel had concerns about whether the appeal should have been brought to the Divisional Court. Neither counsel raised the point before or during the argument. We sought written submissions from both parties on this issue and whether, if we were persuaded that the Divisional Court was the proper forum, the matter should be transferred to the Divisional Court or whether the panel should be reconstituted as one of that court for the purpose of adjudicating this appeal.

[8] In Villa Verde L.M. Masonry Ltd. v. Pier One Masonry Inc. (2001), 2001 CanLII 7060 (ON CA), 54 O.R. (3d) 76 (C.A.), released after this appeal was heard, Rosenberg J.A. held that appeals concerning trust claims under Part II of the Construction Lien Act should be heard by the Divisional Court. Accordingly, this appeal should properly have been heard by the Divisional Court. However, I think that this is one of those rare cases, referred to in Villa Verde, where this panel should, with the designation of the Chief Justice of the Superior Court of Justice, sit as a panel of the Divisional Court for the purposes of this appeal and we have proceeded on that basis.

Analysis

[9] Part II of the Act deals with trusts and Part III deals with liens. Under Part III, if the supply of services or materials is made without knowledge of or contact with the improvement to which the supply is made, no lien entitlement is created. The appellant, Central Supply, submits that the trial judge erred in interpreting the trust provisions in Part II as having an analogous requirement. It argues that, unlike liens, a supplier need not know where or what the improvement is before a trust is created under s. 8 of the Act.

[10] Modern Tile submitted, on the other hand, that the materials supplied by Central Supply were supplied in the ordinary course of Modern Tile's business as a retailer of such products or materials, without regard for the purpose for which they were to be used, and therefore no trust arises.

[11] Three Ontario judgments take a different approach from the one taken by the trial judge in this case about how direct the contact must be between a supplier and an improvement before a trust obligation is imposed under the Act. Re Schulz Concrete Pipe Ltd. (1979), 32 C.B.R. (N.S.) 157 (Ont. S.C.); Re Richmond Bros. Insulation Inc. (1989), 1989 CanLII 4103 (ON SC), 69 O.R. (2d) 22, 73 C.B.R. (N.S.) 284 (S.C. Bkcy); and Maple Leaf Homes & Cottages Inc. v. Zoellner Windows (1982) Ltd. (1989), 34 C.L.R. 6 (Ont. H.C.J.), have held that a supplier is not required either to know or intend that its material would find its way into a specific improvement before a trust arises.

[12] The definition of "material" under the Mechanics' Lien Act, R.S.O. 1980, c. 261, the statutory predecessor to the Construction Lien Act, made no reference to an "improvement". This is a significant difference from the current Act, which focuses remedial attention on specifically designated sites. To the extent, therefore, that the interpretations in earlier cases were based on the former definition, such as Re Schulz, or Re Richmond and Maple Leaf Homes, which applied Schulz, they cannot prevail. With respect, it is my contrary view that, like a lien remedy, there must be a specific, designated site or improvement before a trust may be imposed. (See Joel S. Kuchar, "Breach of Trust Actions Under the Construction Lien Act" (1995), 20 C.L.R. (2d) 18; and Kevin McGuinness, "Trust Obligations Under the Construction Lien Act" (1994), 15 C.L.R. (2d) 208).

[13] The following definitions in s. 1(1) of the Act are relevant:

"contract" means the contract between the owner and the contractor, and includes any amendment to that contract;

"contractor" means a person contracting with or employed directly by the owner or an agent of the owner to supply services or materials to an improvement;

"improvement" means,

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

(b) any construction, erection or installation on,

any land, and includes the demolition or removal of any building, structure or works or part thereof, and "improved" has a corresponding meaning;

"materials" means every kind of movable property,

(a) that becomes, or is intended to become, part of the improvement, or that is used directly in the making of the improvement, or that is used to facilitate directly the making of the improvement,

(b) that is equipment rented without an operator for use in the making of the improvement;

"owner" means any person, including the Crown, having an interest in a premises at whose request and,

(a) upon whose credit, or

(b) on whose behalf, or

(c) with whose privity or consent, or

(d) for whose direct benefit,

an improvement is made to the premises but does not include a home buyer;

"premises" includes,

(a) the improvement,

(b) all materials supplied to the improvement, and

(c) the land occupied by the improvement, or enjoyed therewith, or the land upon or in respect of which the improvement was done or made;

"subcontract" means any agreement between the contractor and a subcontractor, or between two or more subcontractors, relating to the supply of services or materials to the improvement and includes any amendment to that agreement;

"subcontractor" means a person not contracting with or employed directly by the owner or an agent of the owner but who supplies services or materials to the improvement under an agreement with the contractor or under the contractor with another subcontractor;

When materials supplied

(2) For the purposes of this Act, materials are supplied to an improvement when they are,

(a) placed on the land on which the improvement is being made;

(b) placed upon land designated by the owner or an agent of the owner that is in the immediate vicinity of the premises, but placing materials on the land so designated does not, of itself, make that land subject to a lien; or

(c) in any event, incorporated into or used in making or facilitating directly the making of the improvement.

[14] The following sections in Part II of the Act, which is headed "Trust Provisions", are relevant:

Owner's trust, amounts received for financing a trust

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.

Amounts certified as payable

(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

Where substantial performance certified

(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

Obligations as trustee

(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.

Contractor's and subcontractor's trust, amounts received a trust

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.

Obligations as trustee

(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.

Liability for breach of trust by corporation

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

[15] The purpose of the definition of "improvement", as set out in the Report of the Attorney General's Advisory Committee on the Draft Construction Lien Act (Toronto: Ministry of the Attorney General (Ont.), 1982), was "to protect those who contribute their services or materials towards the making of an improvement to a premises". The report also stressed that while the definition of "improvement" was a broad one, it was drafted to make it clear that the lien created by the Act applied "only in the case of the construction and building repair industries".

[16] In determining whether the remedies in Part II and III of the Act should receive a synchronized interpretation, it is useful to consider the following guidance from E.A. Driedger, in his classic text, Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983), where he wrote, at p. 87, that the words of an Act should be read "harmoniously within the scheme of the Act". This was amplified by Prof. Ruth Sullivan in Driedger on the Construction of Statutes, 3rd ed. (Toronto: Butterworths, 1994), at p. 176, as follows:

Governing principle. It is presumed that the provisions of legislation are meant to work together both logically and teleologically, as parts of a functioning whole. The parts are presumed to fit together logically to form a rational, internally consistent framework; and because the framework has a purpose the parts are also presumed to work together dynamically, each contributing something toward accomplishing the intended goal.

[17] The Construction Lien Act is designed to protect those who provide services or materials to a particular improvement or project, by requiring a contractor or subcontractor receiving payment under the contract to pay first those who provided services or materials on that project. Funds received by the contractor or subcontractor on account of the contract constitute a trust fund for the benefit of those who have supplied services or materials to the improvement by virtue of s. 8(1) of the Act. Failure to pay those suppliers who are owed money may constitute a breach of trust for which the directors or officers of a corporate contractor may be personally liable under s. 13.

[18] Although liens and trusts represent discrete remedies under the Act, the scheme and purpose of the Act argue for a consistent approach between Parts II and III of the Act. The similarity in wording between s. 8(1), which delineates when a trust arises under Part II, and in ss. 14 and 15, which outline when a lien is created under Part III, also supports a consistent requirement in both that there be an identifiable improvement before either a lien or trust is established. Under s. 8(1), a trust arises for the benefit of those who have supplied services or materials to an improvement. Similarly, ss. 14(1) and 15 require that before a lien arises, there must be services or materials supplied "to an improvement":

Creation of lien

14(1) A person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials.

When lien arises

15. A person's lien arises and takes effect when the person first supplies services or materials to the improvement.

(Emphasis added)

[19] In my view, therefore, the Act requires that a supplier must intend that the material sold be used for the purposes of a known and identified improvement before a lien or trust arises. Where the supplier is selling material or services without any regard to the purpose or site for which the material is destined, it is deemed to be selling on the credit of the buyer alone, without access to the lien or trust remedies under the Act. The trust provisions of the Act, therefore, create a trust only for the benefit of persons who have supplied services or materials to the improvement, not for the benefit generally of persons who supply contractors. (See Kuchar, supra, at p. 31 C.L.R. and McGuinness, supra, at p. 229 C.L.R.)

[20] The Act was not intended to apply to retailers who sell to members of the public in general and who have no direct connection to any improvement to any premises. Any other interpretation renders vulnerable to a trust obligation any retail store which supplies materials or services to members of the public, regardless of the ultimate use or destination of the product.

[21] Applying the foregoing to the facts of this case, before Modern Tile can be found to be a trustee of contract moneys for the benefit of Central Supply, Central Supply must prove that a trust exists in accordance with s. 8 of the Act. To bring itself within the scope of s. 8(1) of the Act, Central Supply must establish:

(1) that Modern Tile is a "contractor" or "subcontractor";

(2) that moneys are received by Modern Tile "on account of the contract or subcontract price of 'an improvement'"; and

(3) that Central Supply is a subcontractor or other person who has supplied services or "materials" to "the improvement".

That means that the onus on Central Supply is to demonstrate the following three elements: (a) that Modern Tile received money on account of a contract for a particular improvement; (b) that Central Supply supplied materials on that improvement; and (c) that Modern Tile owes money to Central Supply for those materials. (See St. Mary's Cement Corp. v. Construc Ltd. (1997), 1997 CanLII 12114 (ON SC), 32 O.R. (3d) 595 at p. 600, 33 C.L.R. (2d) 234 (Gen. Div.).)

[22] The first two elements are, on the evidence, absent in this case. Neither Modern Tile nor Central Supply knew what Modern Tile's customers did with the products after those products were picked up at the store. Notwithstanding that its invoices sometimes named the customer to whom Modern Tile would be selling the product, Central Supply had never shown any interest in tracing the product supplied to Modern Tile to a specific work site, land, or improvement such that a claim for a lien could have been registered under the Act.

[23] As Modern Tile pointed out, the following findings of fact by the trial judge support the conclusion that the trust provisions of the Act do not apply:

(a) that Modern Tile was not in the construction industry but was a retail merchant selling floor and wall coverings from its store in Niagara Falls;

(b) that Modern Tile sold its products primarily to members of the public;

(a) that customers of Modern Tile came to the store to pick up their ordered goods;

(b) that Central Supply delivered the goods to the store and not to any of the ultimate purchasers;

(c) that Central Supply was not interested in nor inquired as to the names of the ultimate purchasers or the location where the materials were incorporated;

(d) that Central Supply neither intended nor cared if the goods would become part of a particular improvement;

(e) that Modern Tile was not interested in nor inquired as to what its customers did with the product once they picked it up from the store;

(f) that Central supply supplied products to Modern Tile "on account" and on the basis of Modern Tile's "credit";

(g) that Central Supply was at all material times looking to Modern Tile for payment;

(h) that Central Supply followed a "different practice" when dealing with construction contractors (i.e., when dealing with contractors, Central Supply would deliver merchandise to a specific work site and Central Supply would record the specific address and location of where the product was delivered); and

(i) that Central Supply deliberately chose not to follow this practice when dealing with Modern Tile.

[24] These findings led the trial judge to conclude, properly in my view, that Central Supply had failed to prove the following:

(a) that Modern Tile was a "contractor" or "subcontractor" in the construction industry;

(b) that Modern Tile received moneys on account of a contract price or subcontract price of an improvement;

(c) that Central Supply was a subcontractor or person that supplied materials to the improvement;

(d) that there existed any "nexus" or "connection" between the materials supplied by Central Supply and the "improvement" into which the products were ultimately incorporated;

(e) that when Central Supply sold its product to Modern Tile that it intended that these products be used for the purposes of some specific and identifiable improvement;

(f) that Modern Tile's customers were "owners" having an "interest in a premises"; and

(g) that there existed some specific and identifiable "premises."

[25] Central Supply has therefore failed to establish the crucial link, namely, that the material was to be used on a particular improvement. There being no nexus between the material supplied and a specific improvement, the relationship between Central Supply and any "improvement" is too remote to justify the imposition of a trust. As the trial judge noted [at pp. 225-26 C.L.R.]:

In the present case, Modern Tile was simply a retail merchant selling floor and wall coverings and curtains from its store in Niagara Falls to customers who came to the store to pick up their ordered goods. Central Supply delivered the goods to the store and not to any of the ultimate purchasers. Central Supply was not interested in nor inquired as to the name of the ultimate purchasers or the location where the materials were supplied.

If I were to find that the materials supplied by the plaintiff to Modern Tile was impressed with a s. 8(1) Trust, I would have to find that everything that Modern Tile purchased by way of supplies to be resold to customers would be impressed with a similar trust regardless of its ultimate destination or use.

[26] In view of my conclusion that no trust obligation arises in this case, it is unnecessary to deal with whether, under s. 13 of the Act, the Grepleys or Ms. Beltrame were personally liable as individuals who "assent[ed] to or acquiesce[d] in conduct that [they knew] or reasonably ought to know amounts to breach of trust by the corporation . . .".

[27] We did not call on the respondent at the hearing of the appeal to respond to the appellant's allegations of trial unfairness because we saw no merit in those submissions. The few complaints alleged were so minor as not to approach the threshold of impropriety.

[28] I would dismiss the appeal with costs.

Appeal dismissed with costs.