Part II of the Construction Act (“Act”) sets out statutory rights, in addition to lien rights, with respect to the financing and use of project funds in the construction pyramid. Specifically, subsection 7(1) prescribes an “owner’s trust,” and subsection 8(1) prescribes a “contractor’s and subcontractor’s trust.” These trusts have existed for some time and are essentially in place to ensure all accounts for services or materials supplied by those lower in the construction pyramid are paid before the funds are used for any other purpose. A breach of this obligation provides remedies for contractors or subcontractors as against the corporation with which they have contracted, but also personally as against any principal or employee who assented or acquiesced to this breach. These remedies have been traditionally important for unpaid parties when there is an insolvency or bankruptcy.
From a practical viewpoint, the old Construction Lien Act did not expressly prescribe record keeping obligations for a trustee.
As a result of the recent amendments to the Act, section 8.1 requires additional and positive obligations for record keeping. Trustees are now mandated to deposit all trust funds into an account in their name and keep written records detailing the amounts received into, and paid out of, the trust funds. Furthermore, the Act states that a trustee handling more than one trust fund may deposit them into one single account; however, this is conditional upon the trustee maintaining the required written records, separately, in respect of each trust.
The new provisions further state expressly that any trust funds from separate trusts deposited into a single bank account are deemed traceable and the act of depositing them into the same account is not itself a breach of trustee obligations.
The report Striking a Balance: Expert Review of Ontario’s Construction Lien Act recommended these revisions, incorporating similar basic requirements that existed in New York’s Lien Law in order to: (i) assist in clarifying matters where there is defalcation; and (ii) ensure that the statutory trust created under the Act meets the three certainties of a common law trust.[1]
These prescribed requirements ought to provide additional and practical recourse to beneficiaries of a trust seeking proper disclosure from trustees in the face of a breach of trust claim and influence the disclosure process in such proceedings moving forward. Placing increased focus on whether a trustee has complied with these record keeping requirements could be a tool for a claimant to leverage in proving liability.
[1] The Three Certainties are: 1) Certainty of intention, 2) Certainty of subject, and 3) certainty of object.
