The trust provisions of the Construction Lien Act (“The Act”) can provide an effective way to pursue repayment of an account even after the time to register a lien has lapsed. Essentially, the funds that are intended for the financing of an improvement are deemed to be trust funds that cannot be used for any purpose other than to fund the project. The trust provisions can be used to avoid or minimize the impact of having the person who owes money on a construction project going bankrupt. A breach of trust action can be allowed to continue against a person even if he or she has filed for bankruptcy prior to or during the lawsuit. The trust provisions of the Act also allow a party to pursue payment from a director, officer or certain employees of a debtor company personally in appropriate circumstances. These provisions can also provide a creditor with the right to trace the trust funds into other property that was purchased with trust funds. In light of recent economic performance and the increasing number of bankruptcies, breach of trust is a potential remedy that should be considered.
It is important to note the trust claim is an additional remedy to the lien on the land and the charge on the holdbacks. Breach of trust must be pursued through a separate law suit and cannot be joined together in a lien action. The separate action can be commenced against the debtor as well as the director, officers or employees having effective control of the company’s activities.
Requirement of An Improvement
To benefit from the trust provisions the plaintiff (the person bringing the law suit) must be someone who was entitled to a lien. The claimant must prove that there was an improvement and that a supply of labour or material was made. It is necessary to establish a link between the materials and an improvement, although it may not be necessary to prove that the supplier intended for a supply to be incorporated into a known and specific project. It is a good practice for a supplier to ensure, to the extent possible, that purchase orders or other documents reflect the address and project to which the equipment or services are going to avoid uncertainty.
It is the plaintiff’s onus to prove the existence of a trust. Once this is done, the onus shifts to the defendant to show that it applied funds in a manner that is consistent with the trust. So, if a defendant can demonstrate that payments were made out of the trust funds to a proper beneficiary of the trust, there is no liability. Thus it is not a breach of trust to pay subcontractors and supplier on Project A with trust funds received on Project A, even if there is not enough to pay everyone. However, it is a breach of trust for a trustee to pay itself, fund a personal expense, or pay its own overhead before making payments to the beneficiaries of the trust. It is important that a trustee keep good records of the money flow on a project in order to be able to satisfy this onus if it is called upon to do so.