2011 ONCA 359
DATE: 20110509
DOCKET: C51301
COURT OF APPEAL FOR ONTARIO
Goudge, Cronk and Epstein JJ.A.
BETWEEN
Colautti Construction Ltd.
Plaintiff (Defendant by Counterclaim)/ (Respondent/Cross-appellant)
and
Ashcroft Development Inc., Ashcroft Homes Inc., Ashcroft Homes – Central Park Inc., Ashcroft Homes – Crowne Pointe Inc., Crowne Point Development Inc., 1070280 Ontario Inc., 1230174 Ontario Inc., David Choo and Shanti Choo
Defendants (Plaintiffs by Counterclaim)/ (Appellants/Cross-respondents)
Paull N. Leamen, for the appellants and respondents by cross-appeal
Paul J. Pape, for the respondent and appellant by cross-appeal
Heard: December 16, 2010
On appeal and cross-appeal from the judgment of Justice James E. McNamara of the Superior Court of Justice, dated October 29, 2009, with reasons reported at 91 C.L.R. (3d) 218.
Cronk J.A.:
I. Introduction
[1] This litigation arose from a dispute between a group of real estate developers and a construction contractor regarding payment for certain of the contractor’s services on two large residential development projects in Ottawa.
[2] After a 22-day judge alone trial, the trial judge held that the developers were indebted to the contractor in an unspecified amount, that the contractor was entitled to allocate advance payments received from the developers to the contractor’s oldest outstanding invoices billed to the developers, that the developers had breached their trust obligations to the contractor under s. 7 of the Construction Lien Act, R.S.O. 1990, c. C. 30 (the “Act”), that a reference and accounting were necessary to quantify the developers’ indebtedness to the contractor, and that the payment of certain invoices rendered by the contractor should be disallowed on the reference.
[3] The developers appeal the trial judge’s findings on liability and breach of trust. The contractor cross-appeals from the trial judge’s denial of recovery on some of its disputed invoices and from his failure to address its claim for equitable relief arising from the developers’ breach of trust. For the reasons that follow, I would dismiss the appeal and allow the cross-appeal in part.
II. Facts
[4] The corporate appellants, the Ashcroft companies, are developers of residential and commercial real estate in the Ottawa area. They are owned by the appellant, David Choo. Mr. Choo’s wife, the appellant Shanti Choo, worked for the companies in a minor capacity at the relevant time. I refer to the appellants, collectively, as the “Developers” in these reasons.
[5] The respondent, Colautti Construction Ltd. (the “Contractor”), is a basement excavation and municipal services/roads contractor. From about 1997 to 2000, it provided various construction services to the Developers on two major residential real estate projects in Ottawa: Crowne Pointe and Central Park (the “Projects”).
[6] The development of the Projects proceeded in phases. The Contractor’s services were provided under a series of written contracts between the parties. The primary focus of this litigation is the balance owing on seven discrete contracts (the “Seven Contracts”):
Central Park Phase 2 Roads/Servicing Contract – March 30, 1998
Central Park Phase 2 Basement Excavation Contract – June 26, 1999
Central Park Phase 3 Basement Excavation Contract – June 1999
Central Park Phase 3 Roads/Servicing Contract – October 1, 1999
Central Park Commercial Site – June 2, 1999
Crowne Pointe Roads/Servicing Contract – March 1996
Crowne Pointe Basement Excavation Contract – November 1997
[7] The Contractor also provided services on the Projects under additional and older contracts with the Developers (the “Other Contracts”).
(1) Advances and Disputed Allocations
[8] From 1997 to mid-1999, the Developers paid the Contractor’s invoices with cheques bearing counterfoil notations that identified the specific invoices to which the payments related and the Contractor allocated the payments accordingly.
[9] However, the Developers changed this cheque-writing practice in 1999, when the parties’ relationship began to deteriorate. Beginning in June 1999, the Developers provided a series of advance payments to the Contractor by means of seven cheques (the “Advances” or “Advance” individually). The counterfoils to these cheques contained only brief notations that failed to identify specific invoices to which the payments were to be applied. With one exception, each of these cheques was labelled “advance”. The following chart sets out the details contained on the seven cheques:
| Date | Amount | Notation |
|---|---|---|
| June 1, 1999 | $120,000 | Advance |
| November 17, 1999 | $40,000 | Advance/Tim Hortons |
| December 10, 1999 | $60,000 | Advance on Starter Starters [sic] |
| December 10, 1999 | $41,000 | Advance on North Com. |
| December 10, 1999 | $100,000 | Advance on Central Park Subdivision Phase 3 |
| December 10, 1999 | $43,000 | Advance on “G” Units |
| February 28, 2000 | $111,494.64 | Cert. 6, 5 |
[10] The Contractor’s office manager, Marlene Morand, testified at trial that, on receipt of the Advances, she contacted Chris Jacobs, then the Developers’ comptroller, to ascertain the invoices to be paid with the Advances. Several weeks after her inquiry about the first Advance (the June 1, 1999 cheque), Mr. Jacobs instructed Ms. Morand to apply the Advance to a detailed three-page list of invoices rendered by the Contractor, many of which related to ‘old debt’ arising under the Other Contracts. Ms. Morand followed these instructions.
[11] The cheques in respect of the remaining six Advances also bore no references to specific invoices. Ms. Morand repeatedly requested allocation instructions from Mr. Jacobs concerning these Advances. She received no response. As a result, the Contractor’s Chief Administrative Officer, Ron Colautti, directed her to allocate the six Advances to the Contractor’s oldest outstanding invoices on the Projects. The Contractor says that these allocations had the effect of eliminating the Developers’ indebtedness to the Contractor on three of the Other Contracts.
[12] Ms. Morand also testified that, after allocating the six Advances in this fashion, she provided particulars of the allocations to the Developers by fax. Importantly, she received no complaint or objection from the Developers concerning the allocations at any time prior to this litigation. The trial judge accepted this evidence.
(2) Lien Claims and the Litigation
[13] The Contractor alleged that, by March 2000, it was owed approximately $1.2 million for services rendered on the Projects, net of the Advances. Between March 14 and July 18, 2000, it registered nine construction lien claims under the Act for work provided under the Seven Contracts.
[14] The Developers paid the sum of $1,175,101.34 into court in order to vacate the liens. The parties eventually achieved a partial settlement of the lien claims, whereby the Developers paid the Contractor $400,000 to vacate the liens, without prejudice to the resolution of the remaining disputed issues between the parties.
[15] Further litigation soon followed. The Contractor sued the Developers for recovery of $854,493.30 allegedly owing on the Seven Contracts. This amount was later reduced to the $794,475 now in dispute.
[16] The Contractor also claimed other relief in its action, including: (1) a declaration that funds received by the Developers in respect of the Seven Contracts constituted trust funds under s. 7 of the Act; (2) an accounting of the trust funds; (3) damages for lost profits against all the Developers except Shanti Choo; (4) general and aggravated damages against David Choo; and (5) punitive damages against all the Developers, again except Shanti Choo.
[17] The Developers defended the action on the basis that no monies were owing to the Contractor. They also counter-claimed for damages in the amount of $2 million for “back charges, credits and contract reconciliations” and for all “losses and overpayment”.
[18] There are other facts relevant to the issues raised in these proceedings. I will discuss these facts in the context of the issues where they arise.
III. Trial Judge’s Findings
[19] The focus of the trial was on the state of the parties’ accounts in relation to the Contractor’s services under the Seven Contracts and the parties’ competing claims regarding payments and accounting adjustments. Many of the trial judge’s rulings on these issues are not in dispute and the parties accept that, if necessary, a reference as ordered by the trial judge will be conducted after these proceedings to determine various unresolved accounting issues in accordance with the trial judge’s rulings and the decision of this court.
[20] The trial judge’s central findings as pertinent to the issues before this court were as follows:
(1) the Developers did not maintain separate trust accounts for the Projects but, rather, used a separate operating account for each of the Projects in which all funds received were commingled;
(2) all funds received by the Developers for the financing of construction and the improvement of the Projects were impressed with a trust for the benefit of contractors under s. 7 of the Act;
(3) the Developers breached their trust obligations to the Contractor, “as long as there were monies outstanding to [the Contractor]”, by failing to implement a “proper system … to receive, monitor and disburse the trust funds”;
(4) the Contractor supplied services on the Projects;
(5) “assuming that there were monies owed” by the Developers to the Contractor when the Advances were allocated, the Contractor made reasonable inquiries as to the source and intended allocations of the Advances;
(6) the Contractor was entitled to allocate the Advances to payment of “debt outside the [S]even [C]ontracts” provided that “the debt was indeed outstanding”;
(7) the funds paid in partial settlement of the Contractor’s lien claims ($400,000) related to the Seven Contracts and could not be allocated to other debt;
(8) there was “some amount of debt owing” by the Developers to the Contractor at all relevant times;
(9) basement subexcavation work undertaken on select units in Phase 3 of the Central Park Project was not “extra” to the agreed unit prices in the applicable contract (the “Basement Contract”), with the result that the Developers were not liable for invoices relating to this work;
(10) the Developers were also not liable for the Contractor’s invoices relating to any work undertaken after April 4, 2000; and
(11) a reference and accounting were required to reconcile accounts between the parties and to determine the amount of the debt owed by the Developers under the Seven Contracts.
[21] The trial judge made no express ruling on the Contractor’s claim for equitable relief arising from the Developers’ breach of trust.
IV. Issues
[22] I would frame the issues on the appeal in this fashion:
(1) Did the trial judge err by finding that there was “some amount of debt” owed by the Developers to the Contractor?
(2) Did the trial judge err by concluding that the Contractor was entitled to allocate the Advances in the manner that it did?
(3) Did the trial judge err by holding that the Developers breached their statutory trust obligations to the Contractor?
[23] There are two issues on the cross-appeal:
(1) Did the trial judge err by disallowing payment of the Contractor’s invoices for (a) basement subexcavation work relating to the Basement Contract; and (b) all work undertaken after April 4, 2000?
(2) Did the trial judge err by failing to determine the Contractor’s claim for equitable relief arising from the Developers’ breach of trust?
V. Analysis
A. Appeal
(1) Finding of “Some Amount of Debt”
[24] The trial judge did not determine the precise quantum of the debt owed by the Developers to the Contractor under the Seven Contracts, instead ordering a reference to quantify the debt in question. The trial judge’s finding that “some amount of debt” existed was a precondition to his conclusions on the propriety of the allocations of the Advances and the Developers’ breach of trust under s. 7 of the Act.
[25] In respect of the Developers’ indebtedness, when considering the issue of the propriety of the Contractor’s allocations of the Advances, the trial judge stated:
[23] The issue for the court is, then, having determined there was a breach of trust by the defendants and assuming there were monies owed by the defendants to the plaintiff when the allocations were made, did the facts in this matter allow the plaintiff to allocate the monies the way they [sic] did.
[33] In all the circumstances, I find that with relation to [the Advances], the plaintiff was entitled to allocate payment to debt outside the [Seven Contracts], so long as it be established that the debt was indeed outstanding.
[Emphasis added.]
[26] Later in his reasons, the trial judge said:
[35] As indicated above, it is central to both the breach of trust and allocation issues that there was a debt in existence between the parties. Having heard the evidence and considered the many exhibits, subject to the separate issue of quantification, I have no hesitation in finding the existence of debt.
[40] On the evidence then I am satisfied that there was some amount of debt owing at all times relevant to the litigation.
[Emphasis added.]
[27] The Developers argue that the trial judge err by holding that there was “some amount of debt” owing to the Contractor without: (1) determining if, in fact, there was any outstanding debt under each of the Seven Contracts; and (2) considering the total payments made by the Developers on each of the Seven Contracts. The Developers submit that the trial judge arbitrarily dismissed their claim that they had overpaid the Contractor on the Seven Contracts. Finally, the Developers say that the trial judge should have deferred any finding of debt until the Referee determined the amount owing, if any, to the Contractor. I would not give effect to these arguments.
[28] It is important to place the trial judge’s finding of the existence of “some amount of debt” in the context of the issues at trial. As I have said, the question of the existence of debt owed by the Developers was central to any entitlement by the Contractor to allocate the Advances. It was also a precondition to any finding that the Developers had breached their trust obligations under s. 7 of the Act. The key inquiry, therefore, was whether the Developers owed money to the Contractor at the time of the disputed allocations.
[29] With respect to the precondition of an existing debt for any finding of a breach of trust by the Developers, s. 7(4) of the Act provides:
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. [Emphasis added.][^1]
[30] Thus, under s. 7(4) of the Act, proof of unpaid “amounts related to the improvement” owed to the claiming contractor by the owner of the improvement is required to establish an owner’s breach of trust under the Act. The parties accepted that without an unpaid existing debt owed by the owner to the contractor, there can be no breach of trust under s. 7 of the Act.
[31] The trial judge’s reasons reveal that he appreciated the importance of determining whether a debt existed when the Advances were allocated and the distinction between a debt existing at that time and at the time of trial. He had “no hesitation in finding the existence of debt”, commenting that there was “substantial” evidence in support of this conclusion. In particular, he noted that the Contractor had led considerable evidence establishing the existence of “a great number” of outstanding invoices at the time of the allocations, accompanied by “significant” supporting documentation, to which no written
objection had been made by the Developers. He also observed that, “there were issues with the quantification of the debt” but “there was no evidence, expert or otherwise, to support the [Developers’] submission that there was no debt whatsoever”. In the trial judge’s view, “[I]n all likelihood the reason no such evidence was led … was because there was no such evidence to lead.”
[32] These findings were available to the trial judge on the evidence. In particular, the evidence of three of the Developers’ own witnesses support these findings. First, the evidence of Mr. Jacobs, the Developers’ comptroller at the relevant times, suggested that deficiencies in the Developers’ accounting system prevented them from determining which of the Contractor’s invoices had been paid.
[33] Second, the trial judge found John Stokes, the Developers’ construction manager, to be a “very credible and straightforward witness”. Mr. Stokes testified that he had authorized payment to the Contractor on various purchase orders, that these purchase orders should have been paid, and that at least some of the purchase orders on which payment was authorized were never honoured.
[34] Finally, Bill Buchanan, the Developers’ manager of planning and development, testified that he reviewed several disputed invoices at his employers’ request and that he could not recall any occasion when he had advised non-payment of any of these invoices. Yet, even at trial, some of the relevant invoices remained unpaid.
[35] All this evidence told strongly against the Developers’ claim that the Contractor had been paid in full or indeed overpaid.
[36] The trial judge expressly reviewed this incriminating evidence in his reasons. In assessing whether the Developers were indebted to the Contractor at the critical times, the trial judge carefully scrutinized the nature, quality and extent of the available evidence regarding the indebtedness claim. I therefore do not agree that the trial judge arbitrarily disregarded the Developers’ overpayment claim or that he failed to consider evidence relevant to the question of an outstanding debt or overpayment to the Contractor.
[37] The trial judge then directed a reference to quantify the precise quantum of the Developers’ outstanding current debt under the Seven Contracts. In my opinion, there can be no sustainable objection to the trial judge’s decision to proceed in this fashion. As the Contractor emphasizes, the trial transcripts confirm that the need for a reference to ascertain the state of the parties’ accounts and the quantum of any indebtedness under the Seven Contracts were live issues from the opening day of trial. Moreover, on several occasions during the trial, the trial judge raised the need for a reference to resolve quantification issues. The Developers did not object to this proposal.
[38] It was therefore clear throughout this trial that the precise quantum of the Developers’ debt was to be determined on a reference rather than by the trial judge. In these circumstances, it was unnecessary for the trial judge to attempt to reconcile the total payments made by the Developers under each of the Seven Contracts with the Developers’ liability thereunder from time to time. This was the task for the Referee, if necessary.
[39] Finally, the breach of trust and allocations issues in this case turned on whether the Developers were indebted to the Contractor at the point when the Advances were provided by the Developers and allocated by the Contractor to its old invoices. The amount of the Developers’ current indebtedness to the Contractor was irrelevant to this inquiry.
[40] To conclude on this issue, given the manner in which this trial proceeded, the nature of the issues raised for determination, and the parties’ acceptance throughout of the need for a reference to determine quantification issues, it was unobjectionable for the trial judge to hold that a debt of an unspecified amount was owed by the Developers “at all times relevant to the litigation” and to order a reference to determine the precise amount of that debt at particular times.
(2) Disputed Allocations
[41] The Developers attack the trial judge’s finding that the Contractor was entitled to allocate the Advances to “debt outside the [Seven Contracts]” on three grounds. They submit, first, that the Contractor did not plead that it was entitled to allocate the Advances to the Other Contracts, or that it was owed monies on the Other Contracts. Next, they complain that the trial judge’s impugned finding is contrary to the evidence and the Developers’ legal right to designate the debt to which the Contractor should allocate payments. Finally, they submit that the Contractor was precluded from allocating the Advances as it did because the allocations in question placed the Contractor in breach of its own statutory trust obligations under the Act.
(a) Pleadings issue
[42] It is beyond dispute that civil lawsuits are to be decided within the boundaries of the pleadings and that the parties are entitled “to have a resolution of their differences on the basis of the issues joined in the pleadings”: Rodaro v. Royal Bank of Canada (2002), 2002 CanLII 41834 (ON CA), 59 O.R. (3d) 74 (C.A.), at para. 60, citing 460635 Ontario Ltd. v. 1002953 Ontario Inc. (1999), 1999 CanLII 789 (ON CA), 127 O.A.C. 48 (C.A.), at para. 9. See also A-C-H International Inc. v. Royal Bank of Canada (2005), 2005 CanLII 17769 (ON CA), 197 O.A.C. 227 (C.A.), at paras. 15-18; TSP – INTL Ltd. v. Mills (2006), 2006 CanLII 22468 (ON CA), 81 O.R. (3d) 266 (C.A.), at paras. 29-35. Were it otherwise, a party would be denied the right to know the case it has to meet and the right to a fair opportunity to meet that case: Rodaro, at para. 61. However, based on my review of the pleadings and the record in this case, I am not persuaded that this principle is implicated in this case.
[43] The Contractor argues, as it did at trial, that there was no need to advance a specific claim concerning the Other Contracts because there was no debt owing on them at the time its statement of claim was issued. For this reason, its pleading focuses on the debt owed on the Seven Contracts. Nonetheless, the Contractor referenced the Other Contracts in its pleadings in order to establish the quantum of its claim under the Seven Contracts.
[44] Given the focus of its debt action on the unpaid balances owed under the Seven Contracts, I agree with the Contractor that it was unnecessary to plead indebtedness under the Other Contracts. Obviously, no recovery in respect of the Other Contracts was possible in the face of an acknowledgement by the Contractor that the invoices pertaining to the Other Contracts had been satisfied. In these circumstances, proof of a debt owing on the Other Contracts at the time that the Advances were allocated was simply evidence relevant to the quantification of the Developers’ indebtedness under the Seven Contracts.
[45] Furthermore, the trial judge was satisfied that, in accordance with the Developers’ express instructions, “a significant portion” of the invoices to which the Contractor directed the first of the Advances (the June 1999 cheque) was related to “old debt”. This was an acknowledgement by the Developers that they were indebted to the Contractor under the Other Contracts at the time of the allocation of the first Advance. In these circumstances, the Developers could not have been surprised by the trial judge’s admission of evidence bearing on the question of whether debt on the Other Contracts existed at the time of the other allocations. It remained for the Contractor to establish the amount of the Developers’ remaining debt on the reference, taking account of its allocations of the Advances.
[46] It is also noteworthy that paragraph 25(2) of the trial judgment provides that the Referee is to determine, for the invoices against which the Advances were allocated, “the amount owing on any such invoice before such allocation”. The judgment also provides, in paragraph 25(1)(f), that the Developers’ debt to the Contractor is to be reduced by the credits to which the trial judge found the Developers to be entitled.
[47] As acknowledged by the Contractor during oral argument before this court, it will therefore be open to the Developers on the reference to challenge the quantum of the ‘old debt’ against which the Advances were allocated. If there was an overpayment of the amounts owed by the Developers under the Other Contracts, the amount of the overpayment, as determined by the Referee, may also be credited against the Developers’ debt under the Seven Contracts.
(b) Evidentiary issue
[48] The Developers submit that the trial judge’s finding that the Contractor was entitled to allocate the Advances to ‘old debt’ is not supported by the evidence. They rely on the evidence at trial of discussions between Dennis Colautti (for the Contractor) and David Choo (for the Developers) of a refusal by the Developers to pay specific invoices rendered by the Contractor until they were corrected for inaccuracies. The Developers say that this invoicing dispute led them to make advance payments for amounts that the parties accepted were outstanding on the Seven Contracts, that the Advances corresponded to these amounts, and that the Contractor’s office staff misapplied the Advances because they were unaware of the arrangement reached by the parties. I would not accede to this argument.
[49] The trial judge accepted Ms. Morand’s evidence of her repeated unsuccessful efforts to obtain allocation directions from the Developers concerning the six Advances at issue. As I have said, she sought these directions from Chris Jacobs, then the Developers’ comptroller. It seems most unlikely that the Developers’ comptroller would be unaware of, and fail to act on, a negotiated arrangement or understanding concerning advance payments, especially as it was Mr. Jacobs himself who prepared the cheques by which the Advances were provided. More importantly, Dennis Colautti and David Choo gave directly contradictory testimony at trial about whether they had arrived at an arrangement or understanding concerning the services to which the Advances were to be allocated. It is implicit in the trial judge’s unqualified acceptance of Ms. Morand’s testimony that he rejected Mr. Choo’s version of events on this issue.
[50] It is also telling that the suggested arrangement or understanding is inconsistent with Mr. Jacobs’ instructions to Ms. Morand concerning the June 1999 Advance. In large measure, and on Mr. Jacobs’ express written directions, this advance was applied to ‘old debt’, that is, to unpaid invoices on the Other Contracts.
[51] Finally, the trial judge recognized that Dennis Colautti had conceded on cross-examination that several invoices contained inaccurate unit prices and that these errors required corrections. The trial judge allowed for these outstanding corrections on the reference and directed that the Contractor’s claim was to be reduced accordingly.
(c) Developers’ right to allocate
[52] Nor do I agree with the Developers’ claim that the trial judge’s acceptance of the Contractor’s right to allocate the Advances is contrary to the Developers’ right, as debtors, to determine how the Advances were to be allocated.
[53] On my reading of his reasons, the trial judge concluded that the Contractor was entitled to allocate the Advances to its old invoices for two reasons: (1) except with respect to the first Advance, the Developers had failed to exercise their right to identify the debt or services to which the Advances were to be applied; and (2) the Developers were in breach of their trust obligations to the Contractor under s. 7 of the Act.
[54] I agree that the Developers lost their right to allocate the Advances by virtue of their failure to “appropriate” the Advances to specific debt or services despite repeated inquiries by the Contractor. In my view, it is therefore unnecessary for the disposition of this appeal to determine whether, as a matter of law, a breach by the Developers of their statutory trust obligations would also result in the deprivation of their allocation rights.
[55] Common law principles of debtor/creditor law hold that a debtor may generally “appropriate” a payment in the manner it pleases and the creditor must apply it accordingly. In Waisman (c.o.b. Waisman, Ross & Associates) v. Crown Trust Co., 1970 CanLII 158 (SCC), [1970] S.C.R. 553, at p. 560, the Supreme Court of Canada adopted the following statement of Lord Macnaghten in Cory Brothers & Co. v. Owners of the Turkish Steamship “Mecca”, [1897] A.C. 286, at p. 293:
When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor.
[56] Further, a “plain and irrevocable expression of intention” is required to effect an allocation: see Mount Royal/Walsh Inc. v. Jensen Star (The) (1989), [1990] 1 F.C. 199 (C.A.), at p. 213, leave to appeal denied (1989), 105 N.R. 160n; Frankel v. The Queen, 1984 CanLII 5804 (FC), [1984] C.T.C. 259 (F.C.).
[57] Citing St. Mary’s Cement Corp. v. Construc Ltd. (1997), 1997 CanLII 12114 (ON SC), 32 O.R. (3d) 595 (Ont. Gen. Div.) and Ross Gibson Industries v. Greater Vancouver Housing Corporation (1985), 1985 CanLII 230 (BC CA), 21 D.L.R. (4th) 481 (B.C.C.A.), the trial judge indicated that, “the general principle is that trust monies paid on a particular project must be applied against the price of the goods or services rendered for that particular project, and the monies are not to be applied against the oldest outstanding accounts.”
[58] In Ross Gibson, the British Columbia Court of Appeal held that a material supplier who applied payments held in trust for one project to older outstanding accounts on other projects could not establish a breach of trust. A key factor in Ross Gibson, however, was the fact that the material supplier had made no inquiry as to the intended allocation of the payments. As the court emphasized, at p. 491, if a material supplier “who makes no attempt to ascertain the source of funds” were able to then establish a breach of trust, it would be “put in a better position than the one who keeps track of those matters.” This, of course, clearly implies that a supplier who does attempt to ascertain the source of funds, but receives no reply, will be entitled to allocate those payments to older outstanding accounts. This interpretation of Ross Gibson was subsequently endorsed in J.W. Price Construction Ltd. v. Costco Wholesale Corp. (2000), 2000 BCCA 22, 72 B.C.L.R. (3d) 78 (C.A.), at para. 15.
[59] Accordingly, the trial judge in this case correctly stated that the general rule regarding the allocation of trust monies imposes a requirement on the contractor to make appropriate inquiries as to the source of the funds and, if possible, allocate the payment in question to the project linked to those funds: see also STO Industries Canada, Inc. v. L.A. Architectural Coatings Inc. (2002), 21 C.L.R. (3d) 281 (S.C.).
[60] The trial judge found that the Contractor discharged its duty to make appropriate inquiries about the Advances. By repeatedly inquiring as to how the Advances were to be allocated, the Contractor sought to link the Advances to the services or debt to which they related. Yet the Developers failed to respond. Importantly, Mr. Jacobs testified on his cross-examination that he knew by March 2000, at the latest, of the manner in which the Contractor had allocated the Advances – information that he conveyed to Mr. Choo. But neither individual made any complaint to the Contractor.
[61] Against this backdrop, the trial judge concluded that the Contractor’s efforts to obtain allocation instructions reflected “a reasonable course of action in all the circumstances”. He accepted that, absent instructions from the Developers, guesswork by the Contractor as to which invoiced services or debt were linked to the Advances “would create accounting chaos”. I agree.
[62] As I have said, the trial judge found that prior to mid-June 1999, the Developers generally allocated payments to the Contractor by specifying the invoices to which each payment related. This developed practice for allocating payments to the Contractor is confirmed by the Developers’ allocation instructions on the first Advance.
[63] However, this pattern of invoice identification was broken on delivery of the remaining Advances. The cheques comprising the six Advances delivered after June 1999 contained only brief and, in some instances, cryptic references to some of the Seven Contracts. The Contractor performed many services under the Seven Contracts and delivered multiple invoices relating to them. Thus, a mere reference on a cheque counterfoil to one of the Seven Contracts did not assist in identifying the actual debt or services to which the Advance was intended to relate and was regarded by the trial judge as “insufficient” to constitute an allocation to specific debt or services. This factual finding, which is supported by a plain reading of the counterfoils, attracts deference from this court. In this controlling respect, therefore, the Developers failed to “attribute” the Advances to specific debt or services.
[64] In these circumstances, having fulfilled its obligation to make reasonable inquiries as to the source and intended allocations of the Advances, the Contractor had the right under long-established principles of debtor/creditor law to appropriate the Advances itself. This principle was recognized more than a century ago by the Supreme Court of Canada in The Agricultural Insurance Company v. Sargent (1896), 1896 CanLII 4 (SCC), 26 S.C.R. 29, at p. 36. See also The Royal Bank of Canada v. Slack, 1958 CanLII 114 (ON CA), [1958] O.R. 262 (C.A.).
[65] I see nothing that precludes the application of this general principle in the particular circumstances of this case. On the credibility-based findings of the trial judge, this is not a case where the parties agreed to contrary or even particular allocations for the Advances. Nor did the conduct of the Developers evince an intention that the Advances be allocated to specific debt or services. On the contrary, the Developers’ break with their previous practice of linking payments to specific invoices and their persistent silence in the face of repeated requests from the Contractor for allocation instructions militate strongly against any suggestion that the circumstances surrounding the Advances constituted an appropriation of the six Advances by the Developers. The Developers’ continued silence, even after they knew of the Contractor’s allocations, bolsters this conclusion. It follows that the Developers could not seek to defend the Contractor’s debt action on the Seven Contracts on the basis that they had already paid the debt owed and the Advances were misallocated by the Contractor to ‘old debt’.
(d) Contractor’s alleged breach of trust
[66] But that is not the end of the matter. The Developers challenge the Contractor’s ability to allocate the Advances to ‘old debt’ on the ground that, under s. 8 of the Act, the Advances constituted a statutory trust fund in the Contractor’s hands for the benefit of unpaid subcontractors and others who had performed work on the Projects. By allocating the Advances to old invoices rather than to debt under the Seven Contracts, the Developers say that the Contractor breached its own statutory trust obligations.
[67] I conclude that, as between the Developers and the Contractor, this claim is irrelevant to the question of the Contractor’s right to allocate the Advances as it did.
[68] Section 8 of the Act states:
- (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.
[69] Thus, under s. 8(1), “all amounts” received by a contractor “on account of the contract … price of an improvement” are impressed with a statutory trust for the benefit of unpaid subcontractors and other persons who have supplied services or materials to an improvement. By virtue of s. 8(2), a contractor is the trustee of the trust fund and is precluded from using any part of the fund for its own purposes or for any purposes inconsistent with the trust until all the beneficiaries of the trust have been paid: see Rudco Insulation Ltd. v. Toronto Sanitary Inc. (1998), 1998 CanLII 5529 (ON CA), 42 O.R. (3d) 292 (C.A.), at p. 295.
[70] The Developers submit that the cheques constituting the Advances were “amounts” received by the Contractor “on account” of the Seven Contracts, that the Contractor had unpaid subcontractors at the time of the allocations of the Advances and, accordingly, that the Contractor could not apply the Advances to the Other Contracts without breaching its own s. 8 trust obligations.
[71] Even assuming that the Advances were received by the Contractor “on account” of the Seven Contracts and that the Contractor, in fact, had been sued by an unpaid subcontractor for money owing on various projects, I nevertheless conclude that the operation of s. 8 does not undercut the trial judge’s finding that, as against the Developers, the Contractor was entitled to allocate the Advances as it did.
[72] The Developers cited no authority for the proposition that the owner of an improvement is entitled to defend a debt action brought by a contractor on the basis of the contractor’s alleged failure to fulfill its own trust obligations to subcontractors. In my view, this would be contrary to the purpose of s. 8 of the Act. As this court explained in Rudco, at p. 297, s. 8(1) and s. 14(1) of the Act create a financial preference “for one class of creditor not enjoyed by other creditors of the same debtor” (emphasis added). The protected creditors are “down the contractual chain on construction projects”. It is those creditors who have standing to complain of a s. 8 breach. In fact, in Rudco at p. 298, this court emphasized that, “because the legislation creates a preference and a security for certain creditors that did not otherwise exist at common law, it ought to be given a strict interpretation in determining whether a particular creditor is a person to whom the benefit [under s. 8(1)] is given”.
[73] Simply put, standing to complain of a s. 8 breach of trust is limited to those “who stand in direct privity with the contractor and who are owed amounts by the contractor”: 1150402 Ontario Inc. v. Delfino (2003), 2003 CanLII 30581 (ON SC), 62 O.R. (3d) 768 (S.C.), at para. 53. The protected class of creditors are those “down the chain” from the trustee of the s. 8(1) trust fund. The Developers, as owners of the Projects, do not come within that class.
[74] I therefore conclude that any potential breach by the Contractor of its s. 8 trust obligations has no effect on its right, as against the Developers, to allocate the Advances to ‘old debt’ owed for its services on the Projects.
(e) Limitations issue
[75] The Developers advanced an ancillary argument, suggesting that the Contractor allocated the Advances to debt that it could not have pursued due to expiry of the applicable limitation period. By allocating the Advances to this statute-barred debt, the Developers argue, the Contractor effectively avoided the operation of the limitation period.
[76] This argument can be disposed of summarily. It is well-settled that a limitation period bars the remedy, not the right. Accordingly, if a debtor makes a payment without appropriating it to any particular debt, the creditor may appropriate it to a statute-barred debt: see Graeme Mew, The Law of Limitations (Toronto: Butterworths, 2004), at p. 170.
(3) Developers’ Breach of Trust
[77] The evidence at trial established that the Developers had received in excess of $11.6 million in mortgage financing for the Projects from two institutional lenders. These funds, which included loans on some of the Seven Contracts, were eventually deposited by the Developers into a general account from which payments were made on numerous projects and general operating expenses.
[78] Both at trial and before this court, the Developers acknowledged that these funds constituted trust funds in their hands under s. 7(1) of the Act for the benefit of unpaid contractors. Section 7(1) of the Act provides:
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.
[79] It was the Contractor’s position at trial that, as long as the Developers were indebted to it for services performed on the Projects, the Developers were obliged to account for their s. 7 trust funds, that this accounting never took place and, consequently, that the Developers had breached their trust obligations under s. 7 of the Act. The Developers defended this claim on various grounds including, in particular, on the basis that they were not indebted to the Contractor and, in the absence of a debt, no breach of trust arose.
[80] The trial judge disagreed. On the authority of Arborform Countertops Inc. v. Stellato (1996), 1996 CanLII 7999 (ON SC), 29 O.R. (3d) 129 (Gen. Div.), he concluded that “as long as there were monies outstanding” to the Contractor, the Developers had breached their s. 7 trust obligations by failing to implement a “proper system … to receive, monitor and disburse the trust funds”. In my view, on the trial judge’s factual findings, this conclusion is unassailable.
[81] In order to establish a breach of trust under s. 7 of the Act, the Contractor was required to demonstrate that the Developers had received funds that were to be used in the financing of the Projects (s. 7(1)), that the Contractor had supplied materials or services related to the improvement of the Projects (ss. 7(2) to (4)), and that the Contractor remained unpaid for at least some of those materials or services (s. 7(4)). On proof of these prerequisites, it fell to the Developers to demonstrate that they had complied with their trust obligations under the Act.
[82] As set out above, the Developers received significant financing funds in relation to the Projects. Further, there is no dispute that the Contractor supplied services on the Projects. The only s. 7 prerequisite in issue, therefore, was whether the Contractor remained unpaid for any of those services. The trial judge held that there was “some amount of debt” owed to the Contractor “at all times relevant to the litigation”. For the reasons already given, I have concluded that this key finding was open to the trial judge on the evidence.
[83] In these circumstances, the Developers were obliged to demonstrate that they had met their s. 7 trust obligations. They failed to do so. The trial judge found that the Developers failed to produce a detailed accounting or banking records with respect to the bank accounts that they maintained for the Projects. The Developers also failed to maintain records of funds paid out of the Projects’ operating accounts, to contractors or others. Further, based on Mr. Jacobs’ evidence, the frailties of their accounting system precluded the Developers from identifying which of the Contractor’s invoices had been paid.
[84] In contrast, the trial judge found that there were a “great number” of invoices to the Developers shown as outstanding on the Contractor’s accounting system. Although the Developers complain of the sufficiency of the accounting documentation produced by the Contractor, the Contractor tendered copious volumes of invoices and supporting materials at trial. The Developers acknowledged at trial that the Contractor’s invoices on the Seven Contracts were tendered and received. The Developers made no contemporaneous written objection to the invoices. Moreover, on the accepted evidence of John Stokes, there were at least some approved purchase orders for the Contractor’s services that were not honoured.
[85] On these facts, a finding that the Developers had breached their trust obligations to the Contractor was inevitable. As the trial judge aptly said, citing St. Mary’s Cement Corp., at p. 610, a trustee “who deposits trust funds into a general business bank account and intermingles them with other funds from other sources does so at [its] peril”. I agree.
[86] Finally, I again underscore that it is unnecessary to determine in this case whether a breach by the Developers of their s. 7 trust obligations allows the Contractor to allocate the Advances to its unpaid invoices under the Other Contracts.
[87] For the reasons given, I would therefore dismiss the appeal.
B. Cross-appeal
[88] The Contractor cross-appeals from the trial judge’s disallowance of its claims for recovery on two categories of invoices. It also complains of the trial judge’s failure to rule on its claim for equitable relief arising from the Developers’ breach of trust. These issues require only brief comment.
(1) Disallowance of Basement Subexcavation Invoices
[89] At trial, the parties disagreed as to whether basement subexcavation work admittedly performed by the Contractor on units relating to the Basement Contract was “extra” to or included in the agreed pricing terms of that contract. There are five invoices at issue, totalling $93,899.92, which the Contractor says pertain to work performed between October 1999 and March 2000.
[90] The trial judge ruled that the basement subexcavation work was not “extra” to the Basement Contract but, rather, part of its agreed terms, and denied recovery by the Contractor for these invoices. This ruling was based on the trial judge’s conclusion that correspondence between the parties in July 1999 evidenced an express agreement that the Contractor’s finishing work on the existing Basement Contract would not constitute an “extra” for which the Contractor would be entitled to additional payment.
[91] The Contractor submits that this finding is tainted by palpable and overriding error because it is inconsistent with and fails to take account of the trial judge’s earlier ruling that the Contractor was entitled to receive payment on all invoices for services that were referable to approved purchase orders. I agree.
[92] The pertinent facts are as follows. After an invoicing dispute in the summer of 1999, the parties implemented a purchase order system, whereby the Developers agreed to honour invoices related to work performed by the Contractor after July 1999 that was supported by a purchase order issued by David Choo or John Stokes. The trial judge accepted the evidence of John Stokes that, under this arrangement, purchase orders were only issued for “extra” work and, once issued, should have been paid. Based primarily on this evidence, the trial judge held that, “where there are invoices that have a purchase order number that have not been paid, they should have been”. The trial judge directed deductions for invoices to which Mr. Stokes had made changes, where the work was not covered by a purchase order.
[93] The Contractor argues that the five invoices at issue are all supported by purchase orders for “extra” work and, hence, that recovery on these invoices should have been permitted. Before this court, the Developers do not dispute that the invoices are supported by approved purchase orders for post-July 1999 work. However, they counter that four of the five invoices pointed to by the Contractor either do not relate to basement subexcavation work at all, or that they pertain to work undertaken on units other than those applicable to the Basement Contract. The Developers also say that some of the invoices require corrections for admitted inaccuracies.
[94] In his evaluation of the Contractor’s claim for payment of the basement sub-excavation invoices, the trial judge overlooked his prior finding that invoices associated with approved purchase orders should have been paid. This was an error.
[95] Moreover, the correspondence relied on by the trial judge as evidencing an agreement by the parties that basement subexcavation work would not be treated as work “extra” to the Basement Contract is ambiguous. It contains no express reference to basement subexcavation work on existing or future units under the Basement Contract or to work on those units supported by approved purchase orders.
[96] That said, with one exception, it is not possible for this court to determine whether the challenged invoices involve basement subexcavation work on units referable to the Basement Contract. The exception concerns invoice number 510267, in the amount of $16,708.24, which I understand the Developers to have acknowledged is for basement subexcavation work in respect of units covered by the Basement Contract.
[97] In these circumstances, I conclude that the Contractor is entitled to recover from the Developers on those invoices for basement subexcavation work performed after July 1999, relating to the Basement Contract and supported by approved purchase orders. It will be for the Referee to determine which of the five disputed invoices fall within this category and the quantum of the debt owed, taking account of the Developers’ concession on invoice number 510267. I would add that, to the extent that any of the invoices contain admitted inaccuracies, the trial judge held that these should be corrected on the reference.
(2) Disallowance of Invoices for Post-April 4, 2000 Work
[98] In April 2000, as a result of ongoing disputes between the parties about payment of the Contractor’s invoices, the parties agreed on the manner of payment for work to be undertaken by the Contractor after April 4, 2000. In his reasons, the trial judge indicated that this agreement extended to “any work” that was to be undertaken after April 4, 2000. He said:
In a nutshell, for any work that was to be undertaken from that point forward, the value of the work was to be estimated, a corresponding prepayment was to be made into the trust account of the plaintiff’s then lawyer Paul Niebergall, the work would be certified by the engineer, and payment made in accordance with that certification. [Emphasis added.]
[99] Based on this characterization of what the parties term the “Niebergall Agreement”, the trial judge disallowed any recovery by the Contractor on invoices for work performed after April 4, 2000 that were not subject to this trust account payment procedure.
[100] The Contractor argues that the trial judge erred by misinterpreting the scope of the Niebergall Agreement and that, contrary to the trial judge’s interpretation, the Niebergall Agreement provides that only some of the works listed in it were to be subject to the trust account payment procedure. On this basis, the Contractor submits that payment for certain basement finishing work on ongoing projects and other post-April 4, 2000 work not mentioned in the Niebergall Agreement should not have been disallowed by the trial judge.
[101] I disagree. When questioned on this issue at trial, Dennis Colautti was unable to identify any specific work that was done, or any outstanding invoices for such work, that were not included in the Niebergall Agreement. Nor did the Contractor point to any evidence of such work in its submissions before this court. In these circumstances, even if the trial judge erred in his interpretation of the scope of the work caught by the trust account payment procedure under the Niebergall Agreement, this error is of no moment.
(3) Claim for Equitable Relief
[102] In its factum, the Contractor argued that the trial judge erred by failing to address its claim for equitable relief arising from the Developers’ breach of trust under s. 7 of the Act. During oral argument, the Contractor acknowledged that its request for an equitable remedy was not pressed at trial. Nonetheless, it sought to invoke the court’s equitable jurisdiction to permit it to claim compound interest on the amounts found by the Referee to be outstanding and due to the Contractor as a result of the Developers’ breach of trust.
[103] I would reject this claim. As the Contractor concedes, it has no contractual entitlement to compound interest. It failed to plead equitable relief in its statement of claim or to seek it at trial. Further, it did not address a claim for compound interest in its factum on the cross-appeal. In my view, in these circumstances, there is no foundation for the equitable relief sought for the first time during oral argument of the cross-appeal.
VI. Disposition
[104] For the reasons given, I would dismiss the appeal. I would allow the cross-appeal in part, in accordance with these reasons. I would amend paragraph 7 of the trial judgment to add, at the end of the first sentence and after the words “shall be paid”, the following: “including those invoices relating to basement subexcavation work on units in the Central Park Phase III Basement Contract that are supported by a purchase order number and that are allowed by the Referee”. I would also amend paragraph 10 of the trial judgment by deleting the first sentence of that paragraph and also deleting the phrase “without subexcavation” as it appears in the second sentence of paragraph 10. If any further amendments to the trial judgment are required to give effect to these reasons, the parties may contact the Registrar of this court to set a timeline for the delivery of brief further submissions on this issue.
[105] The Contractor has been successful on the appeal and on the cross-appeal in part. I would therefore allow the Contractor costs of the appeal, costs of the motion for leave to cross-appeal and some costs of the cross-appeal. I would fix those costs, on the partial indemnity scale, in the total amount of $54,000, inclusive of disbursements and all applicable taxes.
RELEASED: “STG” “E.A. Cronk J.A.”
“May -9 2011” “I agree S.T. Goudge J.A.”
“I agree G.J. Epstein J.A.”
Appendix A
Construction Lien Act, R.S.O. 1990, c. C.30
PART II
TRUST PROVISIONS
Owner’s trust
amounts received for financing a trust
- (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.
[^1]: The full text of s. 7 of the Act is set out in Appendix A to these reasons.