The Robert Nicholson Construction Company Limited v. Edgecon Construction Inc. et al.

[Indexed as: Robert Nicholson Construction Company Ltd. v. Edgecon Construction Inc.]

Ontario Reports

Ontario Superior Court of Justice,

King J.

March 17, 2015

125 O.R. (3d) 373 | 2015 ONSC 1237

Case Summary

Construction law — Trust fund — Breach of trust — Contractor directing owners to pay advance of funds to related company which provided no services or materials to project — That company not paying subcontractor — Advance being outside scope of Construction Lien Act and amounting to breach of statutory trust conditions under Act — Owners liable to subcontractor despite lack of privity of contract — Construction Lien Act, R.S.O. 1990, c. C.30.

The defendant owners were directed by the contractor on a construction project to pay an advance of funds to 180, a related company which provided no services or materials to the project. The owners did so, allegedly because the contractor's bank was holding its cheques and the arrangement would expedite payments to subcontractors. While 180 paid some subcontractors, it did not pay the plaintiff. The plaintiff sued the defendants for the amount owing. It brought a motion for summary judgment.

Held, the motion should be granted.

The owners' payment to 180 was outside the scope of the Construction Lien Act. It was not a payment by a trustee to a person the trustee was liable to pay. The payment constituted a breach of the statutory trust provisions under s. 10 the Act. The defendants were liable to the plaintiff despite the lack of privity of contract. Section 13(1) of the Act also applied. Accordingly, the liability of the defendants extended to their directors and officers.

Cases referred to

Home Depot Inc. v. Fieder Painting Inc., [1995] O.J. No. 2263, 1995 CarswellOnt 4514 (Gen. Div.); Rudco Insulation Ltd. v. Toronto Sanitary Inc. (1998), 1998 CanLII 5529 (ON CA), 42 O.R. (3d) 292, [1998] O.J. No. 4105, 167 D.L.R. (4th) 121, 114 O.A.C. 272, 41 C.L.R. (2d) 1, 83 A.C.W.S. (3d) 8 (C.A.)

Statutes referred to

Construction Lien Act, R.S.O. 1990, c. C.30 [as am.], ss. 7, (1), (2), (4), 8(1), (2), 10, 13(1), 20

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 60.08(17)

MOTION by the plaintiff for summary judgment.

Martha A. Cook, for plaintiff.

Christopher J. Staples, for defendants RLC Stratford LP and Palstratford Group Inc.

No one appearing for defendant Edgecon Construction Inc. [page374]

[1] KING J.: — This is a motion for summary judgment made by the plaintiff, The Robert Nicholson Construction Company Limited ("Nicholson"), against the defendants RLC Stratford LP and Palstratford Group Inc. (collectively referred to as the "owners").

[2] Nicholson seeks summary judgment in the amount of $141,089.48 plus prejudgment interest from August 25, 2011.

[3] Alternatively, Nicholson seeks an order pursuant to rule 60.08(17) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194] for payment as garnishee in the amount of $152,410.26 plus post-judgment interest from May 27, 2014 in the amount of $2,207.64, an assessed cost of the action and enforcement of the judgment and costs of $3,000 with respect of the order of Morissette J. dated July 9, 2013.

[4] Nicholson also seeks costs of this motion.

[5] By cross-motion, the defendant owners seek summary judgment dismissing the plaintiff's action as against them and seeking costs of the action and motion on a substantial indemnity basis.

Background

[6] The relevant facts in this matter are not significantly in dispute. It is the legal interpretation of those facts that gives rise to this matter. I make the following findings of fact.

[7] The plaintiff operates in the construction business in the Province of Ontario.

[8] The defendant owners were the developers of a facility known as "The Royal Pallisades Retirement Complex" (the "project") in Stratford, Ontario.

[9] The owners entered into a construction agreement for the construction of the project with a company called Edgecon Contracting Corp. on May 22, 2008. The initial contracted price for this construction project was approximately $17 million. Unknown to Nicholson, a subcontractor on the project, Mr. Enzo Mizzi ("Mr. Mizzi"), operated not just Edgecon Contracting Corp. ("E. Contracting"), but three other entities: Edgecon Construction Inc. ("E. Construction"), 1809313 Ontario Inc. ("180") and John 2000 Limited. All four companies were involved with the project to a varying degree. It appears that the owners dealt with E. Contracting and E. Construction as their general contractor ("contractor") for the project. The involvement of 180 is described in more detail below and is what gives rise to the issue in this matter. The involvement of John 2000 Limited is not relevant to these proceedings. [page375]

[10] As part of the construction project, Nicholson and E. Construction entered into a subcontract, part of which included site preparation (the "subcontract").

[11] As per the terms and conditions of the subcontract, Nicholson was required to provide site-servicing and related services and materials. While Nicholson satisfied its obligations, it was not fully paid for the services and materials it delivered to the project. Specifically, the sum of $141,089.48 remains outstanding.

[12] During the completion of this project, the owners and the contractor agreed, at the request of Mr. Mizzi, to pay an advance of $1,364,620 to 180. 180 was used, on at least one occasion, to receive construction advances and to pay construction invoices for the project.

[13] This amount paid (the "payment") to 180 included moneys that were owing to Nicholson. 180 provided no services or materials to the project. Its only involvement was as a recipient and distributor of the sum of $1,364,620, received from the owners. It appears 180 distributed this amount to other subcontractors, but not the plaintiff.

[14] The owners assert that these moneys were redirected to 180 because E. Contracting's bank was holding its cheques, and this arrangement would purportedly expedite payments to the various subcontractors. The owners assert that this was a certified construction payment and that it satisfies the legal requirements of the trust provisions of the Construction Lien Act, R.S.O. 1990, c. C.30 ("CLA").

[15] At no time did the owners notify Nicholson that they had made this payment to 180 nor did they obtain consent from Nicholson to make the payment. The plaintiff has not been paid the full amount it was owed by either the contractor or 180.

[16] The plaintiff learned through examinations that the party it had contracted with, E. Construction, was not the party to the construction contract with the owners. The party opposite the owners was another corporation owned by Mr. Mizzi, namely, E. Contracting. Nicholson sued E. Construction and the owners. E. Construction did not defend and Nicholson obtained a default judgment against them on May 17, 2012, in the sum of $141,089.48. At that time, there was ongoing discussion between Nicholson and Mr. Mizzi and, as a result, Nicholson did not sign a default judgment against E. Construction even though it had not filed pleadings. Settlement discussions were not successful and as Nicholson had determined that both E. Construction and E. Contracting were involved with the project as the contractor, Nicholson obtained, approximately two years later on [page376] May 21, 2014, default judgment jointly and severally against both E. Construction and E. Contracting in the sum of $141,089.48.

[17] The matter before me is a motion by Nicholson to obtain summary judgment against the owners for breach of the trust provisions of the CLA.

[18] Garnishments have been filed against both Edgecon Construction Inc. and Edgecon Contracting Corp. (the "Edgecon defendants"). To date, neither party has paid the plaintiff pursuant to the garnishment order.

[19] To date, no moneys have been paid to the plaintiff by any party in satisfaction pursuant to the garnishments.

Issues

[20] The plaintiff maintains that the payments totalling $1,364,620 made by the owners to 180 did not discharge the owners' statutory trust obligations as required by the provisions of the CLA. As such, they seek an order that the owners are liable to pay the sum of the unpaid account, together with appropriate interest and costs. Alternatively, the plaintiff seeks to enforce the payment of the unpaid sum by way of garnishment should the court order the moneys be paid to the contractor.

[21] The owners deny liability to either of the Edgecon defendants on the basis that they paid all amounts owing to E. Contracting as certified payable by its payment certifier under the terms of the construction contract. As a result, they assert that they owe no further moneys with respect to the project.

[22] The owners also take the position that the CLA sets up separate trust relationships as between an owner and a contractor, between a contractor and subcontractor and between a subcontractor and its own subcontracts. The owners assert that as there was no privity of contract between them and the plaintiff (a subcontractor), the plaintiff has no legal standing to seek a CLA trust provision remedy against them.

Statutory Framework

[23] Since the plaintiff is a subcontractor to the contractor, there is no evidence of any direct contractual agreement between the plaintiff and the owners. Therefore, any relief must be assessed in the context of the statutory provisions of the CLA.

[24] The relevant provisions of the CLA are:

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 [page377] 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.

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.

Payment discharging trust

10. Subject to Part IV (holdbacks), every payment by a trustee to a person the trustee is liable to pay for services or materials supplied to the [page378] improvement discharges the trust of the trustee making the payment and the trustee's obligations and liability as trustee to all beneficiaries of the trust to the extent of the payment made by the trustee.

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.

Effective control of corporation

(2) The question of whether a person has effective control of a corporation or its relevant activities is one of fact and in determining this the court may disregard the form of any transaction and the separate corporate existence of any participant.

Joint and several liability

(3) Where more than one person is found liable or has admitted liability for a particular breach of trust under this Part, those persons are jointly and severally liable.

Analysis

[25] One of the CLA's primary features is its remedy of the common-law requirement of privity between parties. In an industry composed of owners, developers, general contractors, subcontractors, etc., the CLA does away with the need for privity in cases where such privity cannot exist by virtue of the various arrangements.

[26] The CLA accomplishes this by establishing a process whereby contractors and subcontractors can make lien claims against a property that is the subject of a construction project, thereby providing notice that title to the property may not be free and clear until the construction issues are resolved. In this way, issues arising out of the lack of privity of contract between two parties relating to a construction project are potentially remedied.

[27] A second significant component of the CLA is the creation of a statutory trust scheme. Owners, contractors and subcontractors are deemed trustees for moneys owing to other parties [page379] further down the construction chain. The extent of such trust arrangements, and the legal effect of that arrangement, is the core issue in this matter.

[28] The plaintiff asserts such a trust exists in this case.

[29] The plaintiff claims that the $1,364,620 of the trust money received by 180 was not paid in satisfaction of the trust provisions of the CLA because it was paid outside the scope of the CLA. The owners assert the statutory scheme does not apply in the instant case because of a lack of privity between the owners and the plaintiff who was a subcontractor on the project.

[30] Section 7(1) of the CLA establishes that a trust fund is created "for the benefit of the contractor". Once an owner pays the contractor all amounts certified by a payment certifier (less statutory holdbacks), the owner is absolved from any further liability in this regard. The wording of s. 10 makes this perfectly clear. It provides that (subject to holdbacks) once a payment is made by a trustee (here the owner) to a person who has supplied services or materials to the improvement of a property (here the contractor), such payment discharges the trust of the trustee (owner). Importantly, the section then adds such discharge is as against "all beneficiaries of the trust to the extent of the payment made by the trustee" [emphasis added].

[31] The use of the word "beneficiaries" is of paramount importance. It denotes an intent by the legislature to say, in effect, "if you as a trustee (whether owner, contractor or subcontractor) make a payment to the party to whom you are in privity of contract, you are exempt from liability with respect to all other parties lower down the construction chain with whom you have no privity of contract". That is, once a party satisfies their statutory trust obligation with the party they are in a direct contractual relationship with, they are exempt from liabilities to others, even if the party to whom they make the payment misappropriates said monies, or otherwise does not pay the beneficiaries of the trust to which the payee becomes statutorily bound upon payment.

[32] I find that had the legislature intended for this provision to only decide rights between parties to whom there is privity of contract, there would have been no reason to create the trust scheme. There would be no need to create a trust scheme because if a party to a contract pays the other party to the contract what it owes, the matter is settled at common law. The statutory trust scheme is created to

(a) obligate the party to pay the money to whom they are privy for the benefit of that party and the other parties in the [page380] contractual chain. Those lower down, in turn, have a statutory right to receive payment as the party initially receiving the funds is then impressed with a trust themselves; and

(b) exempt a payor from any further liability, or the risk of becoming embroiled in any disputes between those other parties with whom the payor is not in privity of contract.

Furthermore, I find that had the intention of the legislature been otherwise, there would have been no reason to use the plural word -- "beneficiaries".

[33] The owner's defence in this scheme is absolute. If they follow the scheme prescribed by the CLA, they can have no further liability.

[34] However, and unfortunately, that is not what happened in this case. The owners acceded to a request from the principal of the contractor, Mr. Mizzi, to pay $1,364,620 to a company related in law to the contractors, but, most importantly, not related to the project.

[35] I find that this payment, regardless of its motive, had the effect of leaving the sum of $1,364,620 unpaid for the purposes of the CLA from the original purchase price. This is in direct contradiction of the provisions of s. 7(4) of the CLA, which specifically prohibits an owner from appropriating or converting

. . . 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.

[36] Accordingly, for the purposes of the CLA, I find that the payment to 180 was not a payment in satisfaction of any provision of the CLA.

[37] Counsel for the owners suggested that because the payment was made to 180 with the intention that it pay subcontractors, it should, in effect, be considered a payment in satisfaction of the construction agreement. After careful consideration, I conclude this argument must fail. While the owners' intentions may have been bona fides, made in good faith and even done in the expectation or intention of subcontractors getting paid sooner, such payment was made at their peril, and, most importantly, legally outside the scope and protection of the CLA.

[38] In order for the trust scheme created by the CLA to operate fairly, the motive or intention of a payment made outside the scope of the construction contract must be irrelevant. Firstly, the [page381] CLA makes no reference to any exceptions or in any way imports the notion of "intent" into an analysis of the legal effect of such an extra-contractual payment. What may be a legitimate, bona fide business reason for an owner to make an extra-contractual payment in one situation might be an act done to perpetrate a fraud or otherwise avoid the enforceability of a construction agreement in another. More directly, it should not be incumbent on a contractor, subcontractor or subcontractor of a subcontractor to follow and locate the money, but then have to prove the "illegitimacy" of the intent of such extra-contractual payment. Such a payment could often give rise to a preference among various contractors and/or suppliers. In point of fact, the CLA makes no reference to the entitlement of a party to a construction agreement to make such a payment outside the scope of the construction agreement and still claim the protection of s. 10 of the CLA. This is exactly the type of mischief the trust provisions of the CLA are designed to prevent.

[39] Counsel for the owners spent considerable time arguing that because there was no privity of contract between his client and the plaintiff, s. 7(2) of the CLA did not apply. He presented various authorities in support of that proposition.

[40] However, those cases do not stand for the proposition that only the contractor who had privity of contract with the owners has legal standing to make a trust claim.

[41] In the instant case, it would be unreasonable and contrary to the CLA to find that the only party with legal standing to challenge the legal validity of a trust payment is the very party that requested and directed that the payment be made to a related company, that was in no legal way connected to the project, rather than itself. To find otherwise would give rise to the undesirable result that a contractor and subcontractor could conspire to commit a fraud on subcontractors by diverting payments to unrelated third parties and thereby defeat the entire scheme of the trust provisions of the CLA. I find that the trust provisions of the CLA create trust obligations on each party who holds money during the construction process for the benefit of those lower down the chain, at least until they make a proper payment and extinguish their trust obligations as provided in s. 10.

[42] In para. 34 of its factum, the owners assert:

The owners defence to the action is grounded in the fact that they have paid for all services provided by the plaintiff to Edgecon as required under the General Contract. All of the work performed by the plaintiff was certified for payment by the owners' consultant by the date of certificate 34 and payment for same was made by the owners. [page382]

[43] With respect, I do not agree. While it might be correct to state that the owners paid an amount equal to the full amount specified in the original construction agreement, there is no evidence before me that they paid for those funds "as required under the General Contract". The sum of $1,364,620 was not paid to the contractor, as required by the general contract. Therefore, I find that the payment to 180 was not a payment by a trustee to a person the trustee was liable to pay. Therefore, the payment to 180 does not satisfy the provisions of the CLA. Such payment to 180 constitutes a breach of trust in these circumstances.

[44] The lack of evidence that the owners made a 10 per cent holdback from the payment to 180, as prescribed by s. 20 of the CLA, is an additional indicator that the payment to 180 was not a trust payment under the CLA. If said payment had been made pursuant to the construction agreement, the sum of $136,462 would have to have been withheld. There is no such evidence in this regard.

[45] Alternatively, there could have been evidence of a holdback of $151,624. This would have been the required statutory 10 per cent holdback on a cross payment of $1,516,440, for a net payment of $1,364,620. Again, there was no such evidence.

[46] The lack of a statutory holdback further supports a finding that the payment to 180 by the owners did not discharge the owners of their trust obligations pursuant to s. 7. The existence of a holdback payment would not necessarily have the effect of otherwise satisfying the trust provisions of the CLA, but at least might have been some indicia of an effort to comply with the CLA.

Case Law

[47] Rudco Insulation Ltd. v. Toronto Sanitary Inc. (1998), 1998 CanLII 5529 (ON CA), 42 O.R. (3d) 292, [1998] O.J. No. 4105, 114 O.A.C. 272 (C.A.) is an Ontario Court of Appeal decision relied on by both parties that provides significant guidance with respect to the issue of the scope of s. 10. The plaintiff ("Rudco") performed subcontract work for the defendant, Toronto Sanitary Inc. ("TSI"). TSI was also a subcontractor on the project. When TSI received funds owed to it on the project, it made payments to satisfy its own general overhead expenses, rather than as payment to Rudco. TSI went bankrupt soon thereafter, leaving Rudco's account unsatisfied. The trial judge held that the entities who had received payments from TSI were not persons to whom trust benefits were conferred under s. 8(1) and that the [page383] payment of the overhead expenses did not reduce TSI's trust obligations to Rudco under s. 10.

[48] The defendants appealed. In dismissing the appeal, O'Connor J.A. (as he then was) wrote that s. 8(1) creates a trust in favour of subcontractors and that s. 8(2) [at para. 10]

. . . precludes the trustee from using trust funds for its own purposes or any purposes inconsistent with the trust until all the beneficiaries of the trust have been paid.

[49] Furthermore, O'Connor J.A. confirms that the preponderance of cases have found that the payment of overhead expenses does not reduce the trust obligations of a contractor or subcontractor.

[50] As O'Connor J.A. did in Rudco, I also follow the decision of Killeen J. in Home Depot Inc. v. Fieder Painting Inc., [1995] O.J. No. 2263, 1995 CarswellOnt 4514 (Gen. Div.), where he held [at para. 35]:

These trusts reflect the pyramidic nature of the payment scheme devised under the Act and are aimed at creating, as it were, a fortress of impregnability against deductions by either the owner or a contractor from the trusts imposed in favour of the respective beneficiaries down the line.

[Emphasis in original]

Decision

[51] For the foregoing reasons, I find that the owners breached their statutory trust obligations under the CLA.

[52] Had they paid said moneys to the contractor, their statutory obligations would have been satisfied. However, since the owners did not comply with the trust obligations under the CLA, I also find that they cannot rely on the provisions of s. 10 of the CLA to assert that their obligations have been discharged. Specifically, the payment to 180 did not discharge the owners' trust obligations.

[53] I also find that s. 13(1) also applies in the instant case as there has been a breach of trust. Accordingly, the liability of the owners in this matter extends to the directors and officers of the owners.

[54] In the alternative, I find that the plaintiff has standing to seek a declaration that the sum of $1,364,620 remains in trust and unpaid. If I am in error that I do not have jurisdiction to make an order that the owners directly owe moneys to the plaintiff because there was no privity between them, I hereby order that the owners pay the $1,364,620 to the party with whom they have privity -- the defendant, E. Construction. At that point, a trust in favour of the plaintiff is created and the plaintiff can then garnish the amount owing pursuant to the order of Gorman J. dated May 21, 2014. [page384]

[55] For these reasons, I order

(1) summary judgment against the defendants RLC Stratford LP and Palstratford Group Inc. and directors and officers of the defendants RLC Stratford LP and Palstratford Group Inc. in the amount of $141,089.48, plus prejudgment interest from August 25, 2011 to May 26, 2014;

(2) post-judgment interest from May 27, 2014;

(3) in the alternative to (1) and (2) above, payment by the defendants RLC Stratford LP and Palstratford Group Inc. and/or the directors and officers of RLC Stratford LP and Palstratford Group Inc. to the plaintiff as garnishor in the amount of $152,410.26 plus post-judgment interest from May 27, 2014;

(4) costs of this motion as against all defendants. If the parties are unable to resolve the issue of costs within 30 days, they may make written submissions to the court in this regard. I will remain seized for this purpose;

(5) costs of the entire proceeding as against Edgecon Construction Inc. and Edgecon Contracting Corp.

Motion granted.

End of Document