It is commonly known that the incorporation of a company shields the officers and/or directors from liability that a company incurs. Only under exceptional circumstances will officers and directors of a company be held personally liable. However, in the construction industry under the Ontario Construction Act R.S.O. 1990, c. C.30 (the “Construction Act”),[1] the statute specifically sets out the circumstances in which officers and/or directors of a construction company can be held personally liable.
The construction litigation lawyers at Walker Law regularly assist clients facing breach of trust claims. To help you understand how an officer and/or director of a construction can be held personally liable, we explain the trust provisions of the Construction Act below.
Trusts under the Construction Act
Part II of the Construction Act consists of powerful provisions providing a “statutory trust”. A trust, in simple terms, is a relationship in which one person or entity (usually referred to as the “trustee” in legal terms) holds property subject to an obligation to keep or use the property for the benefit of another. A “statutory trust,” then, is a trust formed through legislation (for example, the Construction Act). Part II of the Construction Act sets out provisions which create this “statutory trust” within the context of construction law. The trustees in the construction context are the construction companies themselves, their officers and their directors.
Part II of the Construction Act creates two main types of statutory trusts:
- Section 7 establishes a trust fund for the benefit of contractors[2]; and
- Section 8 establishes a trust fund for the benefit of contractors and/or subcontractors.[3]
Under both sections 7 and 8, the money that a contractor and/or subcontractor receives during the lifespan of a construction project, is deemed to go into a “statutory trust”. A visualization of the various relationships and the construction pyramid will assist with understanding the statutory trusts under the Construction Act:
Breach of Trust Actions under the Construction Act
What is the purpose of the statutory trusts? Statutory trusts come with certain rules which protect contractor and subcontractor payments. One such rule is that the trustees should not use the funds which are deemed to be held in trust, for their own use until all contractors, subcontractors and/or other parties who supply services or materials to an improvement (a project / the work) are paid all amounts that are owed to them. Examples of using trust funds for personal use would be[4]:
- A company paying its officers and/or directors before contractors and/or subcontractors are paid;
- A company paying its own bills on another project; or
- A company paying its overhead costs (ex. rent, legal fees, marketing costs, etc.) instead of paying contractors and/or subcontractors what they are owed.[5]
The failure to use the trust funds to pay the contractors and/or subcontractors what they are owed first, may result in a “breach of trust” claim.[6] If a construction company misused money, it can be held liable. More interestingly, Section 13 of the Construction Act permits the officers and directors of that company to be held personally liable as well.[7]
The most common claims in construction disputes are breach of trust claims. For an officer or director to be found personally liable for breach of trust, it must first be found that the construction company misused trust funds. Only if the company is found liable for breach of trust, will Courts in Ontario look at whether the officers and/or directors are personally liable. The key terms of the legal test to find personal liability is whether the officer or director “assented to, or acquiesced in” the company’s misuse of trust funds. In simple terms, if an officer or director of a construction company accepts, or reluctantly accepts the companies misuse of trust funds, the officer or director can be held personally liable for the amount owed to the contractor and/or subcontractor.
A breach of trust can result in construction litigation claims against a construction company and/or its officers and directors. If you or someone you know is facing a breach of trust claim, please contact the construction dispute lawyers at Walker Law.
[1] The Construction Lien Act, R.S.O. 1990, c. C.30 (the “Old Act”) was amended by the Construction Act R.S.O. 1990, c. C.30 (the “Act”). The new Act came into force on July 1, 2018.
[2] Section 7(1) of the Construction Act.
[3] Section 8(1) of the Construction Act.
[4] These are examples only.
[5] Marino v. Bay-Walsh Ltd. (May 29, 2002), Doc. 98-0469, [2002] O.J. No. 2211 (S.C.J.)
[6] Sections 7(4) and 8(2) of the Construction Act.
[7] Section 13(1) of the Construction Act.