Beyond the Lien: Other Remedies for Unpaid Contractors and Suppliers

Breach of Trust

The breach of trust provisions contained within the Construction Act (the “Act”) can be a powerful remedy for unpaid contractors and suppliers.

The idea behind a trust is that money is held by one person (a trustee) for the benefit of another (a beneficiary).  The Act establishes both an owner’s trust (which is held for the benefit of a contractor), as well as a contractor and a subcontractor’s trust (which are held for the benefit of other parties further down the construction pyramid).  Anyone who receives money with respect to a construction project and owes money to other players beneath them should be mindful of these provisions.

Owner’s Trust

All amounts received by an owner that are to be used in the financing of an improvement (i.e. a building mortgage) constitute a trust for the benefit of the contractor.  This means that the owner cannot use these funds for things like operating expenses until the contractor is paid.

Where a contractor is paid based on a progress certificate, an amount that is equal to what has been certified as payable constitutes a trust fund for the benefit of the contractor (provided that the money is actually in the owner’s hands or received thereafter by the owner).  Similarly, where a certificate of substantial performance is issued and the contractor is not paid in full, the unpaid amount constitutes a trust for the benefit of the contractor (provided that the money is actually in the owner’s hands or received thereafter by the owner).

If an owner sells the improved lands, this also creates a trust fund for the benefit of the contractor.

Contractor’s and Subcontractor’s Trust

Likewise, all amounts received by or owing to a contractor or subcontractor on account of the contact or subcontract price constitute a trust fund for those who are owed money by the contractor or subcontractor. Subject to certain exceptions, a contractor who receives money on account of its contract must use those monies to first pay those who provided them services and materials.  Failure to do so constitutes a breach of trust.

Personal Liability

The Act now specifies that anyone who receives trust funds shall deposit those funds into a bank account in the trustee’s name and maintain records dealing the funds that come in and out of the account.

One of the advantages of a breach of trust claim is that individual actors can be held personally liable for a corporation’s breach of trust.  Where the entity receiving the money is a corporation, the director, officer, or other person who is controlling the corporation and who engages in conduct which they know (or ought to know) amounts to a breach of trust is personally liable.

 

Labour and Material Payment Bonds

One of the recent changes to the Act which will benefit subcontractors and suppliers is the requirement that performance bonds and labour and material bonds be furnished for all public projects of a certain size.

Performance bonds and labour and material bonds will be required for all projects where the contract price is over $500,000 involving the Crown, a municipality, or a broader public sector organization (i.e. a hospital, school board, etc.).

A labour and material payment bond is designed to ensure that a contractor will pay claimants (i.e. subcontractors or suppliers) who supply goods or services to a project.  A performance bond is designed to ensure that a contractor will perform its obligations under the contract.

The Act now requires the use of standardized bond forms.  The new bond forms contain very tight timelines within which sureties must respond and include protection for subcontractors and suppliers up to the portion of the holdback the contractor would have been obligated to pay the subcontractor under the Act.

For holdback amounts, claimants must file their Notice of Claim within 120 days after the claimant should have been paid in full.  For other amounts, claimants must file their Notice of Claim within 120 days from the last day they supplied materials or services to the project.

For contracts where the new adjudication provisions apply, bond claim disputes with respect to bonds required by the Act may be referred to adjudication.

 

If you have not been paid on a job, please contact our Kanata office for a no obligation consultation.