Case Comment: The Construction Lien Act and the Breach of Trust Claim

Part II of the Construction Lien Act, R.S.O. 1990, c C.30 (“CLA”), sets out the trust provisions and breach of trust claim, which is often overlooked. One-Way Drywall Inc. v. Lomax Management Inc. is a welcomed reminder that a breach of trust claim is an alternate remedy and is suitable for the collection of monies in certain situations. In particular, the decision reminds us that a claim for breach of contract and breach of trust may be brought together. A breach of trust claim is appropriate where there is a risk that a defaulting company may face bankruptcy, and the breach of trust claim is a strategic tool to get under the skin of those who control the defaulting company, as it threatens personal liability and intrusively requires financial disclosure.

The Facts

In June 2010, One-Way Drywall Inc. (“One-Way”) was retained by Lomax Management Inc. (“Lomax”), the general contractor, to provide drywall services for the construction of a Holiday Inn in Toronto.  Lomax failed to make several payments to One-Way for its services. Unfortunately, One-Way was outside of the statutory time limit to register a claim for lien.  In September 2011, One-Way sued Lomax for breach of contract for the failed payments and claimed against Lomax, Richard Jeffrey and Jean Danilko, President and Vice-President of Lomax, respectively, for breach of trust under sections 8 and 13 of the CLA. The Defendants denied any breach of trust and counterclaimed for defective workmanship.

A lengthy back-and-forth between One-Way and the Defendants delayed the proceeding for several years, which the Court found was largely caused by the Defendants. The following is a glimpse of what transpired. First, Lomax convinced One-Way to place the litigation on hold due to pending settlement negotiations between Lomax and Holiday Inn in a claim for lien action. Second, following a settlement between Lomax and Holiday Inn, funds were placed in a trust account to cover One-Way’s breach of trust claim. The funds were then released to Lomax, but following One-Way’s protest, and threats of a claim against Lomax’s lawyer for releasing the funds, the funds were returned to a trust account. Third, the Defendants delivered an unsworn Affidavit of Documents which listed only seven documents, none of which disclosed financial information related to the trust claim. Thereafter, the Defendants ignored One-Way’s requests to remedy the deficient document disclosure. Finally, the Defendants rescheduled the examinations for discovery on at least five occasions, and when the examinations did proceed, the Defendants refused to answer any questions pertaining to the trust allegations, receipt and disbursement of trust funds. The stage was set for the Defendants’ summary judgment motion.

The Summary Judgment Motion

In February 2016, the Defendants brought a summary judgment motion, which amongst other relief, sought to dismiss the breach of trust claim.  The Defendants argued that One-Way’s breach of trust claim was “moot, inefficient, and a waste of time” and “that the trust claim should not encumber the claim and their counterclaim”.[1] The argument was based on the reasoning that the Defendants had placed funds equal to One-Way’s claim in a trust account, meaning there was no misappropriation of funds. Further, Jeffrey and Danilko were willing to personally guarantee any payment owing to One-Way.  Thus, the Defendants argued that One-Way should simply proceed to prove its breach of contract claim.

The Decision

On February 29, 2016, Justice Perell’s decision was released in which he dismissed the Defendants’ “chutzpah[2]summary judgment motion”[3]. Justice Perell noted that no legal precedent was provided to support that “expediency based on a defendant’s provisional confession of judgment or the defendant’s offering to hold funds to the credit of the action secured by personal guarantees” should “triumph over access to justice”[4]. As such, Justice Perell upheld the breach of trust claim as its dismissal would bar One-Way from pursuing a “tenable and purposeful cause of action”[5] that could have value in certain circumstances.
More importantly, Justice Perell noted that a breach of contract claim and breach of trust claim are distinct remedies, and that the breach of trust claim has a “substantive legal value to One-Way that is not replicated by the breach of contract claim”[6].  The enforceability of the judgment for a breach of trust claim differs from a breach of contract claim in that a breach of trust claim may survive a bankruptcy.  Referring to section 178(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, Justice Perell noted that there was case law that supported finding “a breach of the statutory trust under the Construction Lien Act”, which “may qualify as a liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity”[7].

The Lesson

Although there was no known bankruptcy issue in One-Way, the decision is nevertheless a practical reminder of the value of a breach of trust claim.  If there is a risk that a defaulting company may face bankruptcy, or that the conduct of those who control the company is questionable, a breach of trust claim should be considered.

This article can also be found here: http://www.corestone.ca/respect-breach-trust-claim/