2021 ONSC 5601

COURT FILE NO.: 19-1648

DATE: 20210903

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

CLEARWATER STRUCTURES Plaintiff

– and –

614128 ONTARIO LTD. o/a TRISAN CONSTRUCTION Defendant

K.L. MacDonald and B.T. MacDonald for the Plaintiff

K.J. McKenzie for the Defendants

HEARD: June 2, 3 and 9, 2021

McCARTHY J.

REASONS ON MOTION FOR SUMMARY JUDGEMENT

Introduction

[1] The Plaintiff moves for summary judgment seeking:

(a) judgment against the Defendants on a joint and several basis for breach of trust in the amount of $560,552.16 plus accumulated interest;

(b) an order directing the Accountant of the Superior Court to pay to it the sum of $535,501.95 plus accumulated interest towards that judgment;

(c) an order directing the Defendants and the Bank of Montreal to pay the Plaintiff the remaining balance of a segregated trust fund account at the Bank of Montreal, 100 New Park Place, Vaughan, Ontario, account #3997 8991-653 (“the BMO account”).

[2] For their part the Defendants move for summary judgment for the following relief:

a) an order dismissing the action as against the Defendants;

b) an order for set-off in the amount of $75,434.07;

c) an order consolidating the present action with two related actions.

Rule 20.04 “Mini-Trial”

[3] Pursuant to the expanded powers available to a motions judge under rule 20.04, the court ordered a mini-trial of the issues in dispute. The evidence at the mini-trial thus featured a measure of viva voce evidence in addition to affidavit evidence and an agreed set of facts.

[4] A mini-trial does not automatically displace a trial proper; rather it serves as a means to augment the evidentiary record and allows the court to better exercise the powers set out in sub rule 2.1 of rule 20.04 (i.e. weighing the evidence, evaluating the credibility of a deponent and drawing reasonable inferences from the evidence) within the summary judgment exercise.

[5] Following a mini-trial, the court will only grant summary judgment if it is satisfied that there is no genuine issue requiring a trial with respect to a claim or defense.

Statutory Provisions

[6] Part II of The Construction Lien Act, R.S.O 1990, c. C. 30 as amended (“the Act”) contains the trust provisions relative to contractors and subcontractors. It is noteworthy that s. 8.1 of the Act was not in force at the time of the events in question; it therefore has no application to the case at bar.

[7] Section 8 of the Act provides as follows:

8(1) Contractor’s and subcontractor’s trust, amounts received a trust

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.

8(2) Obligations as trustee

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 person who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor.

[8] Section 12 of the Act deals with set-off claims of the trustee. It provides as follows:

[12] Set-off by trustee

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.

[9] Section 13 addresses who in the corporate setting is liable for any breach of trust. It provides (in part) as follows:

13(1) Liability for breach of trust by corporation

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 a breach of trust by the corporation is liable for the breach of trust.

13(2) Effective control of corporation

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.

13(3) Joint and several liability

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.

Factual Background

[10] The Defendant corporation (“Trisan”) was the contractor retained by the County of Simcoe (“the project owner”) for the improvement to the Elliott Bridge on County Road 90 in Angus (“the project”). Trisan entered into a sub-contract with the Plaintiff corporation (“Clearwater”) on or about May 2, 2016, whereby Clearwater was to provide labour, services and materials for road reconstruction and bridge replacement on the project.

[11] In total, Clearwater invoiced Trisan the sum of $3,722,300.54 under the sub-contract. Trisan had achieved substantial performance on the project by July 17, 2018. The Certificate of Substantial Completion was posted on July 30, 2018.

[12] Trisan admitted that its policy is to pay subcontractors within a reasonable period, usually within 30 days, following payment by the project owner. It is also Trisan’s policy to provide its subcontractors with information regarding whether Trisan has received subcontract funds.

[13] According to the evidence of Ross Porter, one of Clearwater’s directors, issues about quantities on site and progress draws began to arise between Clearwater and Trisan. This caused delays in payments on the sub-contract. Attempts to resolve these issues with Trisan were unsuccessful.

[14] To protect its rights under the Act, Clearwater registered a claim for lien on the project on September 4, 2018. This lien was subsequently vacated when Trisan posted security through a lien bond in the amount of $1,040,911.29 (“the bond”). The bond is the subject matter of a separate action.

[15] On October 28, 2020, Trisan confirmed that four sub-contract extras claimed by Clearwater, totaling $41,318.74, had been paid by the project owner.

[16] The amount of $535,501.95 from a segregated BMO account was ordered paid into court on December 24, 2020.

[17] On January 11, 2021, counsel for Clearwater confirmed to Trisan that a claimed fifth extra for Stage II U-fill in the amount of $22,269.03 had been completed by Clearwater (“the fifth extra”).

[18] There was no evidence that any of the work performed by Clearwater was deficient, sub-standard or required rectification.

[19] During the mini-trial Trisan delivered an accounting via a supplementary affidavit from its financial department which suggested that the trust fund stood at $534,762.18.

The Plaintiff’s Position

[20] Clearwater’s position is straightforward. It performed the work under the sub-contract; it provided the extras. Trisan has received the funds in respect of both the sub-contract and extras from the project owner. Those funds are subject to a statutory trust. The failure by Trisan to pay out those funds constitutes a breach of trust. Moreover, the failure of Trisan to provide an accounting of the trust funds to Clearwater, despite repeated requests over many months, also amounts to a breach of trust.

[21] Clearwater is prepared to agree that the trust fund calculation of $543,762.18 is accurate, subject to the addition of the fifth extra ($25,164.00 inclusive of HST), any accrued interest and the remaining balance in the BMO account.

Defendant’s Position

[22] Trisan admits that it owes Clearwater $534,762.18 inclusive of HST on the sub-contract. This amount consists of holdback, contract funds and some approved extras. Trisan also admits that this amount constitutes trust funds for the purpose of the Act.

[23] Trisan claims set-off in the amount of $75,434.07, made up of charges for interest on the holdback, the cost of the lien bond and charges for various administrative costs.

[24] According to the mini-trial evidence of Angelo Santorelli, Trisan’s operating and controlling mind, Trisan could not and would not pay the balance of the sub-contract price until the lien and the bond were removed. On the other hand, in closing written submissions, the Defendants argue, inter alia, that there is no requirement for a trustee to pay out trust funds—it is only that the trustee cannot use funds for a purpose which is inconsistent with the trust provisions of ss. 7 and 8 of the Act.

The Trust Provisions of the Act

[25] The purpose and operation of the trust provisions of the Act were summarized by Molloy J. in St. Mary’s Cement Corp. v Construc Ltd., 1997 CanLII 12114 (ON SC), [1997] O.J. No. 1318 (ONSC) at para. 6:

The trust provisions of the Construction Lien Act provide additional protection for trades and suppliers on construction projects beyond the protection provided by the rights to file liens against the property. Essentially, the Act requires that a contractor or subcontractor who receives money on account of its contract on a project must use those monies first to pay those who provided services or materials on the project. A failure to do so will constitute a breach of trust for which, in certain circumstances, the directors, officers or controlling minds of a corporate contractor may be personally liable.

[26] In order to show a breach of this statutory trust, the onus is on the Plaintiff subcontractor to prove the existence of the trust by showing that:

(i) the general contractor received money from the owner of the project;

(ii) the subcontractor supplied services or materials; and

(iii) the subcontractor was not paid.

[27] The onus then shifts to the contractor to show that it applied the money in line with the statutory trust obligation. The contractor has a duty to account for the monies it has received and failure to do so gives rise to liability for breach of trust: see (see Firenze Exteriors Inc. v Westwing Construction Group Inc., 2005 CanLII 5880 (ONSC) at para. 9. Such an accounting requires the contractor to justify any expenditure from the trust funds.

Breach of Trust

[28] I find that the Defendants have breached their duty as statutory trustees by failing to pay the monies to the Plaintiff in a timely fashion and by failing to provide an accounting of trust funds received when requested to do so. The Defendants received money from the owner of the project; Clearwater supplied the services and materials in its subcontract; Clearwater has not been paid the amount to which it is entitled.

[29] With the greatest of respect, to give any credence to the suggestion that the failure to release trust funds when they become due and owing cannot constitute a breach of trust would serve to completely undermine the purpose and effect of the trust provisions of the Act.

[30] The Defendants cite and rely upon an excerpt from the decision in Susin v Genstar Development Co. (2001) 14 C.L.R. (3d) 292 at paragraph 29, affirmed (2003) 27 C.L.R. (3d) 161 (“Genstar”). The particular passage cited by the Defendants is found only in the trial judgment (it is neither reiterated nor referenced in the short endorsement from the Court of Appeal). It reads as follows:

Even if the $41,485.50 holdback balance constituted a trust fund in Home Smith’s hands, the fact that the $41,485.50 was not paid by Home Smith to Aarvi in 1974 or any reasonable time thereafter does not in and of itself establish that Home Smith breached its trust obligations.

[31] A more careful reading of Genstar reveals that the action in that case was dismissed based on limitation defenses and laches. As well, the issue of payment was complicated by alleged deficiencies identified by a project manager. There was no evidence to support what the court found was merely a bald allegation of breach of trust. I find that the decision in Genstar does not and could not stand for the immutable proposition that a failure to pay out trust funds received and owing on a sub-contract can never constitute a breach of trust. Allowing the contractor to conduct its business in this way would lead to the absurd situation wherein a contractor could retain funds owing to a subcontractor arbitrarily and indefinitely without concern for its obligations under the Act. Such conduct would create commercial chaos and allow a contractor to hold off paying a subcontractor for any number of bogus or flimsy reasons or for any number of ulterior purposes.

[32] As trustee of funds received from the project owner, Trisan stood in a fiduciary relationship to Clearwater. It had a statutory duty not to appropriate or convert the funds to its own use; but equally it had an obligation not to put those funds to any use inconsistent with the trust until Clearwater was paid what it was owed under the sub-contract.

[33] There is no evidence to suggest that Trisan diverted the trust funds owing to Clearwater. Trisan nevertheless put those funds to a use inconsistent with the purpose of the trust—that purpose being to ensure that Clearwater as a subcontractor was paid what it was owed within a reasonable period of time. As a result, Clearwater was obliged to lien the project to protect its rights. According to both Santorelli and his controller Colleen Rogers (“Rogers”), it was this entirely legitimate and legal action by Clearwater which prompted Trisan to make no further payments to Clearwater.

[34] I am aware of no authority that would permit a contractor to shed its fiduciary duty by acting in a manner inconsistent with the trust simply because a subcontractor has advanced lien rights under a different provision of the Act.

[35] I acknowledge that the Act does not provide a time frame within which a contractor must pay the subcontractor the trust funds. Still, there must be some point beyond which a contractor who has failed to turn over trust funds to a subcontractor will be found to have breached her trust obligations. Each case must be decided on its own facts. In the case at bar, the following should be considered:

1. Trisan achieved substantial performance on the project on July 17, 2018, and the certificate of substantial completion was posted on July 30, 2018.

2. Following Trisan’s posting of the lien bond to vacate Clearwater’s lien, the sum of $535,501.95 was paid into a BMO segregated account controlled by Trisan. This payment was made unbeknownst to Clearwater. At or about the same time, Santorelli instructed Rogers not to pay Clearwater anything further because Clearwater had placed a lien on the project.

3. Santorelli never advised Clearwater that he was not going to pay them any further subcontract proceeds.

4. Trisan never applied to the court for directions, choosing instead to retain the funds in an account over which it had exclusive control.

5. Between January 5, 2019, and September 10, 2019, Clearwater made no less than eleven requests of Trisan for an accounting, specifically asking whether the latter had received payment of the subcontract proceeds, the holdback and the extras.

6. Clearwater’s lawyer followed up with Trisan’s lawyer for an accounting on April 21, 2019. At the same time, he made it clear that Clearwater was prepared to execute an appropriate acknowledgment or release and agree to reduce the amount of the lien and bond claim in return for the statutory trust payment.

7. Trisan’s lawyer responded on behalf of Trisan on April 26, 2019, stating that, “in order to get this resolved and release the remaining contract funds and holdback requested they need to reconcile your client’s numbers item by item the way they were broken down in the contract document. Apparently your client has only given them a global number that they are finding it hard to work with.” There was no suggestion that the only way Clearwater could get paid was if it relinquished its legal right to lien. There was no suggestion that there was any set-off being claimed. In fact, Trisan’s set-off claim never materialized until well after the trust action was commenced.

8. Following the April 26, 2019, email from Trisan’s lawyer, Clearwater responded with the requested information that same day and went on to follow up on May 8, 10, and September 10, 2019. No reply was received.

9. After moving for summary judgment, the Defendant served responding materials which revealed for the first time that Trisan had deposited the sums due to Clearwater into a segregated fund.

[36] On the particular facts of this case, both the failure to pay out the trust funds owing to the subcontractor within a reasonable period of time and the failure of Trisan to provide an accounting of those trust funds upon request amounted to a breach Trisan’s fiduciary and statutory duties as trustee.

[37] I agree with and adopt counsel for the Plaintiff’s simple but effective submission that, “The mini-trial boils down to whether there is any justification for the non-payment of the substantial trust fund to Clearwater.” There was no such justification and never has been. The money should have been paid; it was not. The contractor breached its trust obligations under the Act. The remedy which flows inexorably from that breach must be that Clearwater is entitled to a judgment against the statutory trustee(s) for the funds in question.

Who Were the Trustees?

[38] The scope of who can be found liable for breach of trust under ss. 13(1) and (2) of the Act is broad.

[39] In the present case, it is abundantly clear that Santorelli must be found to have committed a breach of his trust obligations. As the principal and directing mind of Trisan, he was in a position to know that trust monies had been received and to understand that his obligation was to pay them to the subcontractor. The evidence is clear that he instructed Colleen Jones not to make further payments to Clearwater. In doing so, he breached his obligation as trustee and fiduciary. I reject any evidence which would suggest that Santorelli was unaware that funds had been received from the project owner or that Clearwater had made repeated requests for an accounting.

[40] Santorelli was the person ultimately responsible for the operation of the business. The failure to provide the requested accounting must ultimately be laid at his feet. I find that Santorelli has breached his obligation as trustee of contract funds to both pay those funds to Clearwater and provide the accounting which was so persistently sought.

[41] Trisan elected to conduct itself in this fashion even though it was the company’s usual policy to pay its subcontractors within 30 days and to provide those same subcontractors with information regarding whether Trisan had received subcontract funds from the owner.

[42] The evidence also establishes that Colleen Jones, as the head of Trisan’s financial department, had effective control over those trust funds. She admitted to having received instructions from Santorelli not to pay Clearwater any further funds. I find that she well understood the obligation the contractor had to pay out those funds. By following the instructions of Santorelli, I find that she has acquiesced or assented to conduct by the corporation that she knew or ought to have known constituted a breach of Trisan’s trust obligation. She too is liable for breach of trust.

The Claim for Set-Off

[43] I am not prepared to allow any amount for the set-off claim for the following reasons.

[44] One, I can give no weight to the evidence of Dawn Ronan (“Ronan”), whose affidavit from February 24, 2021, contained a chart summarizing the set-off expenses. That affidavit was prepared some 15 months after the summary judgment motion was brought and nearly two and a half years after some of these charges were incurred. Moreover, the existence of these set-off charges would have been known to Trisan’s counsel for some time and certainly by April 26, 2019, when she wrote to the Plaintiff’s counsel setting out what Trisan required to pay the trust funds; yet there was no mention of any set off claim until Ms. Ronan’s responding affidavit. I find Ronan’s evidence wholly unreliable and nothing more than an attempt to justify Trisan’s untenable position that trust funds should now be held back to satisfy expenses chargeable to the Plaintiff.

[45] Two, Ms. Ronan did not provide an explanation or produce any supporting documents for the calculation, the specific names of the persons listed, time sheets or any detail of the services rendered. The court did not receive any affidavit or viva voce evidence from the persons listed in the Set-Off summary.

[46] Three, I am not persuaded that the administrative charges should be the responsibility of Clearwater. As subcontractor, it did nothing more than fulfill its obligations, invoice for labour and materials supplied to the project, protect its lien rights and request an accounting of trust funds. I am not persuaded that these claimed administrative charges had any more to do with the Clearwater subcontract than they did with the normal day to day operations of Trisan.

[47] Finally, to the extent that these charges were incurred as a result of the lien action, the present action or the request for an accounting, they arose because of Trisan’s unjustified failure to pay the funds over to its subcontractor. The bonding costs would not have been incurred and would not have recurred had Trisan paid the trust funds within a reasonable period. I find that none of these charges should be set off against Clearwater’s entitlement to the trust funds.

[48] There is no genuine issue requiring a trial of whether the set-off charges should be deducted from or charged back against the trust funds. Trisan has failed to put its best foot forward to tender compelling and persuasive evidence to support its claim. The court should not speculate that new or better evidence would be available at trial.

The Fifth Extra

[49] There is no genuine issue requiring a trial of whether Clearwater is entitled to the fifth extra. There is uncontradicted evidence that Clearwater completed that fifth extra, that Trisan was paid by the owner for the fifth extra and that back up documentation was provided for that fifth extra. The sum of $22,269.03 plus HST being held by Trisan is impressed with a trust. Those trust funds must be delivered to Clearwater.

The Balance of the BMO Segregated Account

[50] There is no genuine issue requiring a trial of the entitlement to the remaining balance in the BMO account. Because the funds in that account were segregated trust monies for the benefit of the subcontractor, any amounts remaining and any interest earned on those funds belong to the Plaintiff as beneficiary of the trust.

Final Considerations

[51] I am not persuaded that summary judgment cannot be granted because there are related actions pending between the parties to the sub-contract. One, should judgment be granted here, the Defendants will undoubtedly be granted a credit for any amount which serves to reduce the amount owing in the related actions. Two, Clearwater clearly expressed its willingness back in April 2019 to reduce the amounts sought in the lien and bond claims and to execute the necessary acknowledgments and/or partial releases. Three, I was furnished with no evidence about the nature or status of those related actions beyond some vague references that they existed. Finally, the trust provisions of the Act create a scheme that imposes obligations and remedies which are distinct from those found under the law of liens.

Disposition and Remedy

[52] There are no genuine issues requiring a trial of this action. Having considered the entirety of the evidentiary record and invoked the powers conferred on me by the summary judgement rule, I am convinced that no purpose would be served in having this matter proceed to trial. No trial judge would be in a better position to adjudicate on these issues.

[53] The breach of trust by Trisan demands a remedy. That remedy shall be as follows:

a) there shall be judgment in favour of Clearwater for breach of trust on a joint and several basis against the Defendants in the amount of $559,926.18 which is comprised of the following:

(i) the agreed upon amount of the trust fund for the sub-contract ($534,762.18);

(ii) the amount for the fifth extra ($25,164.00 inclusive of HST);

b) there shall be an order directing the Accountant of the Superior court of Justice to pay Clearwater the sum of $535,501.95 plus accumulated interest which shall serve as a credit towards the judgment in (a) above;

c) there shall be an order directing the Defendants and the BMO to pay Clearwater the residual amount in the BMO account. Subject to any further adjudication, this sum shall serve as a credit towards the judgment in (a) above.

[54] Should the parties be unable to agree on any remaining issues or ancillary orders to be made, including but not limited to pre-judgment interest, costs and the form and content of any order, they shall serve and file written submissions according to the following schedule:

(i) written submissions of the Plaintiff limited to 5 pages double-spaced on or before September 30, 2021;

(ii) responding submissions of the Defendant limited to 3 pages double-spaced on or before October 15, 2021;

(iii) reply submissions of the Plaintiff, if any, limited to 2 pages double-spaced on or before October 22, 2021.

[55] The Plaintiff’s motion is allowed and the cross-motion of the Defendant dismissed. There shall be judgment in favour of the Plaintiff in accordance with the foregoing.

Justice J. R. McCarthy

Released: September 3, 2021