Court File and Parties

COURT FILE NO.: 15-65803 DATE: January 04, 2019

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: San Remo Lighting Manufacturing Company Limited v. Am-Tech Electrical Inc. Pomerleau Inc., James Archie McKellar, and Aine Mary McKellar

BEFORE: Master Fortier

COUNSEL: Andrew Ruzza, for the Plaintiff Keith MacLaren and Bryce Dillon, for the Defendants

Endorsement

[1] The plaintiff, San Remo Lighting Manufacturing Company (“San Remo”) brings a motion for summary judgment under rule 20 of the Rules of Civil Procedure. San Remo asks that the defendants’ statement of defence and counterclaim be struck and judgment entered in its favor on the basis that the defendants breached their trust obligations under the Construction Lien Act, R.S.O. 1990, c. C.30 (“CLA”).

[2] As a preliminary matter, the defendants sought leave to introduce a supplementary affidavit which was served on the plaintiff on May 31, 2018. This was over the objection of the plaintiff. In essence, the affidavit was in reply to the plaintiff’s affidavit and contained evidence regarding the defendants proposed set-offs against amounts contractually due to the plaintiff. I declined to allow the introduction of the supplementary affidavit because the plaintiff had not had the opportunity to cross-examine the deponent of the affidavit. Moreover the delivery of the affidavit was in breach of Master Champagne’s (as she then was) ordered timetable established for this motion. In any event, the evidence contained in the affidavit is not dispositive of the issues on this motion.

Background

[3] San Remo is a distributor of electrical supplies and materials.

[4] This action arises out of the supply of electrical products by San Remo to the defendant Am-Tech Electrical Inc. (“Am-Tech”).

[5] Am-Tech is an electrical contractor and was retained by Pomerleau Inc., (“Pomerleau”) a general contractor, to complete electrical work in respect of several projects known at Lansdowne Park in Ottawa including the Horticulture Building and the Landsdowne parking garage (“the Project”).

[6] From June 12, 2014 to December 22, 2014 Am-Tech made several purchases of electrical supplies from San Remo. San Remo rendered invoices to Am-Tech totaling $102,520.70 for the orders. Although Am-Tech admits having received the invoices, they have not been paid.

[7] San Remo commenced this action for the unpaid invoices and for damages for breach of trust pursuant to the provisions of the CLA. In its defence and counterclaim, Am-Tech pled a set-off with respect to all amounts that San Remo alleges to be owing. According to Am-Tech, both the set-off and the counterclaim arise from San Remo’s defaults including the delivery of incorrect material, materials not delivered and delays in the Project.

[8] It is San Remo’ evidence that it did not receive any notices from Am-Tech with respect to alleged deficiencies or regarding any claimed set-off or chargebacks prior to the commencement of this action. In fact, it is San Remo’s evidence that Am-Tech repeatedly promised to pay the amounts owing once it had received payment from Pomerleau.

[9] The evidence further establishes that all monies received by Am-Tech from Pomerleau for the Project were deposited into a single general account from which Am-Tech paid all of its ongoing expenses and costs including wages, dividends, bonuses, rent, equipment, supplies and subcontractors.

[10] Am-Tech admits that it did not retain or segregate monies pursuant to the trust requirements of the CLA.

[11] On May 31, 2018, less than three weeks prior to the hearing of this motion, Am-Tech placed $102,000 in trust with its counsel to purportedly satisfy Am-Tech’s trust obligations under the CLA and in reference to San Remo’s claims.

Issue

[12] At issue in this motion is whether the defendants’ right to assert a set-off against the plaintiffs’ claim where it has not retained trust monies as required under the Section 12 of the CLA raises a genuine issue requiring a trial.

Law and Analysis

[13] As provided by rule 20.01(1) a plaintiff may move with supporting affidavit material or other evidence for summary judgment on all or part the claim in the statement of claim. Summary judgment is to be granted by the court if there is no genuine issue requiring a trial (rule 20.04(2)).

[14] In determining whether there is a genuine issue requiring a trial, the court must consider the evidence submitted by the parties (rule 20.04(2.1)). Summary judgment will be available if there is sufficient evidence to justly and fairly adjudicate the dispute. The judge must be able to make the necessary findings of fact, to apply the law to those facts and thereby arrive at a just result. Hryniak v. Mauldin, 2014 SCC 7, at para. 49.

[15] The relevant provisions of the CLA are sections 8 and 12 and read as follows:

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.

Set-off by trustee

12 Subject to Part IV, a trustee may, without being in breach of trust, retain from trust funds an amount that, as between the trustee and the person the trustee is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee’s favour of all outstanding debts, claims or damages, whether or not related to the improvement.

[16] It is San Remo’s position that Am-Tech’s expending of the trust funds for its own operational needs and its failure to retain the moneys in trust as required by the CLA is fatal to its right to claim a set-off against amounts contractually due to San Remo.

[17] The plaintiff argues, correctly in my view, that section 12 of the CLA allows the trustee to set off its claim as against the beneficiary of a trust fund but only in circumstances where the trustee has retained the funds in trust which it has been paid in respect to the materials and work provided by the sub-contractor (San Remo). As explained by the Ontario Court of Appeal in Architectural Millwork and Door Installations Inc. v. Provincial Store Fixtures Ltd., 2016 ONCA 320:

The availability of the right of set-off under s. 12 of the CLA requires the party seeking to exercise it to prove the existence of specific circumstances and particular considerations, including the existence of trust funds against which set-off can be applied. If no trust funds are retained or all the monies are spent, the purpose of the trust provisions is defeated and any right of set-off is extinguished: Arborform Countertops Inc., at paras. 39 and 43.

[18] The plaintiff submits that the defendants’ right to set-off was lost when the funds that constituted the actual trust under the CLA were disbursed and not preserved, in breach of the provisions of the CLA. As held by LaForme J. in Arborform Countertops Inc. v. Stellato:

… the intention of section 12 of the Act, especially when read together with the prohibiting provisions of section 8, is to allow the trustee to retain moneys alleged to be for set-off, but not to expend them. In the case before me, all moneys were spent by the trustee thereby defeating the purpose of the trust provisions in protection of payment to the Plaintiff supplier. Such dealings of the trust fund are then fatal to the Defendants', trustees', right of set-off of claims by the Plaintiff, beneficiary, against the fund. The Defendants, in such circumstances, cannot therefore rely upon section 12 of the Act to advance the right of set-off. Indeed, I would hold that the Act prohibits them from doing so.

[19] San Remo takes the position that Am-Tech’s attempt to satisfy its trust obligations under the CLA by paying its lawyer the amount of monies it was originally required to retain, cannot cure the breach of trust. In other words, a trustee should not be permitted to cure a breach of trust once it has occurred.

[20] Am-Tech responds that there was no trust obligation on their part to retain the moneys because they allege that no moneys are in fact owing to the plaintiff. In my view, this argument fails for the following reasons:

a) In my opinion, it is clear from the evidence before me that a trust was created under s. 8 of the CLA in that: i- Am-Tech received monies on account of its contract price for the project; [4] ii- Materials were supplied on the project; [5] and iii- Am-Tech is indebted to San Remo for those materials. [6]

b) There is an absolute obligation under sections 8 and 12 the CLA to retain the funds in trust in the circumstances of this case. The trust provisions of the CLA do not permit the trustee to disburse the trust fund by reason of having a claim which it wishes to assert by way of set-off against the beneficiary. As held by LaForme J, in Arborform:

The authority section 12 grants to a trustee was given judicial meaning by Coo J. in Datasphere . In reasons which I adopt, the learned Justice had this to say:

There is no right in [the trustee] to put some or all of the funds to general use because in its view, in light of claims it has or proposes to assert against the beneficiary-contractor, the ultimate arithmetical calculations will demonstrate that the trust moneys owing net out a balance less than the gross total of the funds retained. The word used in s. 12 is "retain" not "spend." Arborform, at para. 42.

c) Am-Tech has now deposited moneys in its lawyer’s trust account purportedly to satisfy Am-Tech’s trust obligations to San Remo under the CLA.

[21] Am-Tech further argues that by depositing the full amount of San Remo’s claim in its lawyers’ trust account, its trust obligations to San Remo under the CLA are now satisfied. There are sufficient funds to satisfy San Remo’s claim and therefore there is no ongoing breach of trust. Am-Tech distinguishes the Ontario cases cited above on the basis that the claimant did not re-constitute the trust fund before trial.

[22] Am-Tech relies on the 2016 Manitoba Court of Queen’s Bench decision in Stuart Olson Construction Ltd. v. Structal Heavy Steel, 2016 MBQB 56. Olson deals with the trust provisions under the Builders’ Liens Act C.C.S.M. c. B91 which are similar to the trust provisions under the CLA.

[23] The facts in Olson are similar to the facts in the present case. In Olson, the general contractor, Stuart Olson Construction Ltd., (“Olson”) failed to retain funds in trust for one its subcontractors, Structal Heavy Steel (Structal) pursuant to s. 4 of the Builders’ Liens Act (the “BLA”). Olson alleges that its failure to retain the funds was as a result of a mistake. The funds, as in the present case, were utilized by Olson to satisfy others. Section 4 (3) (a) of the BLA reads as follows:

Duties of contractor respecting trust fund

4(3) A contractor receiving a sum mentioned in subsection (1) is the trustee of the trust fund and he shall not appropriate or convert any part of the trust fund to or for his own use or to or for any use not authorized by the trust until (a) all sub-contractors who have entered into a sub-contract with him and all persons who have supplied materials or provided services to him for the purpose of performing the contract have been paid all amounts then owing to them out of the sum received;

[24] In order to “cure” the breach of trust, Olson later placed the funds ($4 million) in a segregated account called “Structal Trust Funds” and commenced an application asking the court to deem the $4 million to be builder’s lien trust funds for the sole benefit of Structal to be paid into court until the dispute between the parties is determined.

[25] Structal’s position was similar to that of San Remos in that it was argued that one cannot “simply reconstitute” the trust by providing “new” monies” because this would circumvent the statutory trust obligations. As in the present case, Structal contended that Olson lost its ability to argue the issue of set-off because Olson did not retain the trust funds as required but instead utilized them for its own purposes.

[26] While acknowledging that there was a breach of trust by Olson, the court found that the ramifications of the breach must be considered and evaluated during the litigation process regardless of the reasons for the breach Olson at paras. 22, 26. As held by the court:

…I acknowledge that the characterization of the relief sought is now altered; however, a summary determination on this matter is inappropriate and requires resolution under the substantive litigation, which now includes Structal's October 2015 breach of trust claim. There are complex issues to be determined between these litigants that include rights of set-off. I also am not convinced that, at this juncture, this court has the jurisdiction to summarily grant the requested damages by way of a notice of motion. Olson at para. 34.

[27] What was of immediate concern to the court in Olson was the proper handling of the monies in light of the breach of trust. The court opined “Under trust law, liability may be imposed to restore beneficiaries, such as Structal, to the position they would have held had the breach not occurred.” Olson at para. 23.

[28] Under the circumstances, the court in Olson deemed the $4 million as section 4 trust funds under the BLA and ordered that the money be paid into court stating:

[36]… These monies, deemed to be trust funds under the Act, will have protection from any and all creditors or other claimants. I do not view such an order as rectifying Stuart Olson's breach of trust, but instead as serving to protect the monies and preserving the status quo for the benefit of Structal so that the genuine issues between the parties may be dealt with. This decision is very fact centric in the circumstances and is done in order to preserve and protect the funds and to place the parties in the same position they were in before Stuart Olson's breach of trust. Olson at para. 36.

[29] I respectfully agree with and adopt the reasoning in Olson that the “new fund” serves to protect the funds and the sub-contractor’s entitlement to be paid and preserves the status quo for the benefit of the parties so that the substantive issues can be dealt with at trial on the merits.

[30] As in Olson, the characterization of the relief sought was altered in the case before me. Am-Tech failed to retain funds under the CLA and created a new fund by placing $102,000 in trust with his counsel to satisfy Am-Tech’s trust obligations under the CLA and to the credit of this action. I agree with the court in Olson, that in circumstances such as these, the failure to retain funds must be considered and evaluated during the trial process and that a summary determination would be inappropriate. It can be argued that by placing the $102,000 in trust with his counsel, the defendant has restored the plaintiff to the position it would have been in had the trust fund not been depleted. This can be addressed by the trial judge in the context of a full evidentiary record. There are genuine issues between these litigants requiring a trial including the claim for breach of trust and rights of set-off. I therefore decline to grant summary judgment in this matter.

Conclusion

[31] For the reasons outlined above, in my view, there is a genuine issue requiring trial with respect to the evaluation and consideration of the defendants’ failure to retain funds pursuant to the CLA. Accordingly, the motion for summary judgment is dismissed.

[32] The sum of $102,000 placed by the defendants in trust as described in paragraph 11 above, shall be paid into court to the credit of this action within 30 days of the date of this order.

[33] Although Am-Tech has achieved some success on this motion, in view of the events leading up to this motion, as outlined in the plaintiff’s factum at paragraphs 22 to 27, along with the attempt by Am-Tech to cure its default only shortly before the argument of this motion and three years after the commencement of this litigation, I exercise my discretion to not award costs to Am-Tech. There will be no costs of this motion.

Master Marie Fortier