Construction Trust Claims: How to Protect Yourself Posted onMay 12, 2017June 23, 2020/ Devry Smith Frank LLP Caught up in the moment of construction work chaos and scrambling to complete jobs, it is all too easy for invoices to accrue and accounts to build up. While construction liens provide one way to secure payment due to contractors and subcontractors, preventing one’s lien rights from expiring requires meeting strict deadlines, which are often missed. Construction Trusts The Construction Lien Act creates a scheme for statutory trusts which exist for the benefit of contractors and subcontractors. All amounts received by an owner, other than the Crown or a municipality, that is to be used in financing a project constitute a trust fund for the benefit of contractors. Similarly, all amounts owing to a contractor or subcontractor, whether or not due or payable, or received by a contractor or subcontractor, on account of the contract or subcontract price of 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. Owners and contractors who hold funds in the trust can only apply those funds for purposes consistent with the trust. Otherwise, the corporation or person who is the trustee along with the officers and directors of a corporate trustee, and any person “who has effective control of a corporation or its relevant activities” which could include employees or agents of the corporation, may be held personally liable. This can often make a difference from a recovery perspective, especially if the payer is a corporation, and the corporation is insolvent. According to St. Mary’s Cement Corp. v Construc Ltd., the following elements must be proven to establish the existence of a trust: The plaintiff who is owed did supply services or materials: This can be established by oral testimony or substantiated through documentation including invoices, communication confirming services and materials provided (ie. By e-mail, text, etc), account statements, etc. The project is considered an “improvement” pursuant to the Construction Lien Act: According to section 1(1) of the Act, an “improvement” means, in respect of any land (a) any alteration, addition or repair to the land, (b) any construction, erection or installation on the land, including the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land, building, structure or works, or (c) the complete or partial demolition or removal of any building, structure or works on the land The contractor would have to describe its role in the project, the work it was hired to complete, the work that was in fact completed, and how it fits under one of the three categories above. The plaintiff is owed monies on the project The defendant(s) received money for the improvement: The plaintiff would need to demonstrate that the defendant(s) – be it the owner of the property, the general contractor, or a higher-up sub-contractor – has received funds for work completed. This information may be obtained by way of a request for information under section 39 of the Act. While construction trust claims may be a useful tool for contractors and subcontractors who are seeking to collect on unpaid accounts, the flipside of this is that owners, contractors, and sub-contractors who are trustees need to be cautious in order to avoid exposure. In addition to keeping proper records, trustees should keep trust funds separate from their general accounts. When trust funds for the project are mixed with other funding and expenses in one general bank account, it is much more difficult for a trustee to account for the trust funds and as a result, the trustee is more likely to become exposed. For more information or any other questions regarding construction trusts, please contact our construction law team of lawyers. “This article is intended to inform and entertain. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” Related Posts Posted onSeptember 22, 2020April 10, 2024/ Christopher W. Statham Construction Law 101: Explaining Construction Liens What is a Construction Lien? Under the Construction Act a person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien for the price of the services or materials over the interest of the owner on the premises. In this respect, a lien functions as a security interest, securing payment [...] Read more Posted onDecember 6, 2019July 5, 2023/ Christopher W. Statham More Changes to the Construction Lien Act Are Coming in 2019 Ontario’s new Construction Lien Amendment Act (the “Act”) has significantly overhauled Ontario’s construction law rules. While the first set of the amendments have already come into force (see our previous blog here), the second set of changes with respect to prompt payment, a new adjudication process and procedural rules are set to come into force [...] Read more Posted onNovember 27, 2019July 5, 2023/ Christopher W. Statham Ontario Has a New Construction Act: What You Need to Know About the Transition Period On July 1, 2018, the first set of changes under Ontario’s Construction Lien Amendment Act (the “Act”) came into force. This Act overhauls Ontario’s construction regulatory framework. Not only should the changes be made note of by Ontario businesses in the construction sector, but the implementation of similar legislation is expected to follow in other [...] Read more Posted onJanuary 20, 2017June 16, 2020/ Devry Smith Frank LLP Leaning on Liens for Payment Construction and renovation work can sometimes involve multi-layered contractual relationships between the various players in a construction project, where there are numerous complex areas of consideration. An owner or developer may hire a general contractor, who will then contract with subcontractors for various jobs such as carpentry, plumbing, and electrical work. In the same way, [...] Read more