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Paved With Good Intentions: Ensuring Payments Comply with CLA Trust Provisions
Posted on: January 5th, 2016 by

The decision of the Ontario Superior Court in Robert Nicholson Construction Co. v. Edgecon Construction Inc. underscores the importance of ensuring that payments by owners and contractors to their subcontractors or suppliers are made in compliance with the trust provisions of the Construction Lien Act. Payments made to a third party outside of the construction “pyramid”, even when done in good faith and at the request of the intended recipients, can leave owners and contractors (and their directors/officers) liable for an unintended breach of the CLA trust provisions.

Background

The defendant Owners were developers of a retirement residence in Stratford, Ontario (the “Project”). The Owners entered into a construction agreement for the Project with a company called Edgecon Contracting Corp. (“Contracting”). E. Contracting entered into various subcontracts including subcontracts with two entities: Edgecon Construction Inc. (“Construction”) and a numbered company, 1809313 Ontario Inc. (“180″). The Owners dealt with both E. Construction and E. Contracting as their General Contractor for the Project.

E. Construction entered into a subcontract with the plaintiff, Nicholson. Unknown to Nicholson, the principal of E. Construction, Mr. Enzo Mizzi, also operated E. Contracting (the contracting party with the Owners) and 180.

During completion of the Project, the Owners and the General Contractor agreed, at Mr. Mizzi’s request, to pay an advance of approximately $1.8 million to 180, which had no contractual involvement in the Project. The amount paid to 180 included monies owing to Nicholson which went unpaid after Nicholson’s subcontract work was complete. 180 made payments to subcontractors to the Project but not to Nicholson.

Nicholson sued E. Construction and the Owners. Nicholson then moved for summary judgment against the Owners for breach of the trust provisions of the CLA.

Decision of the Ontario Superior Court of Justice

Nicholson argued that the Owners’ payments to 180 did not discharge the Owners’ statutory trust obligations under the CLA.

The Owners denied liability on the basis that they had paid all certified amounts to their contractual General Contractor, E. Contracting. The Owners also argued that the CLA creates separate trust relationships between: owner and contractor; contractor and subcontractor; and subcontractor and its subcontracts/suppliers. The Owners asserted that, as a result of Nicholson’s position in the construction “pyramid” as a sub-subcontactor, it had no legal standing to enforce the Owners’ trust obligations owed E. Contracting.

A significant component of the CLA is the creation of a statutory trust scheme. Owners, contractors and subcontractors are deemed to be trustees for all monies owing to other parties lower in the construction chain or pyramid. As the motions judge noted, an owner, as trustee for funds owing to the contractual general contractor, can discharge its trust obligations by complying with s. 10 of the CLA:

Once an owner pays the contractor all amounts certified by a payment certifier (less statutory holdbacks), the owner is absolved from any further liability in this regard. The wording of s. 10 makes this perfectly clear. It provides that (subject to holdbacks) once a payment is made by a trustee (here the Owner) to a person who has supplied services or materials to the improvement of a property (here the Contractor), such payment discharges the trust of the trustee (Owner). Importantly, the section then adds such discharge is as against “all beneficiaries of the trust to the extent of the payment made by the trustee”.

In rejecting the Owners’ arguments, the motions judge found that the use of the word “beneficiaries” in the CLA trust provisions was determinative:

[beneficiaries] denotes an intent by the legislature to say, in effect, “if you as a trustee (whether owner, contractor or subcontractor) make a payment to the party to whom you are in privity of contract, you are exempt from liability with respect to all other parties lower down the construction chain with whom you have no privity of contract.

The motions judge held that by agreeing to Mr. Mizzi’s request to pay 180 the funds properly payable to the contractual General Contractor, E. Contracting, the Owners had failed to make payment to a deemed beneficiary of the construction trust funds and in accordance with the trust provisions of the CLA.

The motions judge considered the underlying intention of the Owners in making the payment to 180 but concluded that intention was irrelevant for determining compliance with the CLA trust provisions:

While the Owners’ intentions may have been bona fides, made in good faith and even done in the expectation or intention of subcontractors getting paid sooner, such payment was made at their peril, and, most importantly, legally outside the scope and protection of the CLA.

The motions judge found that the Owners had breached their statutory trust obligations under the CLA and granted summary judgment in favour of Nicholson for its unpaid subcontract balance.

Discussion

There are several useful lessons to be learned from this decision. Of note, this decision confirms that the underlying intent for an extra-contractual payment is irrelevant for determining whether a party has discharged its CLA trust obligations. As the motions judge noted:

What may be a legitimate, bona fide business reason for an owner to make an extra-contractual payment in one situation might be an act done to perpetrate a fraud or otherwise avoid the enforceability of a construction agreement in another.

All paying parties in the construction “pyramid” must take precautions to ensure that payments are made to parties with whom they have a direct contractual relationship. Payments to non-contractual parties, even where such payments are requested by the downstream contractual parties to facilitate payments, should be avoided unless proper precautions can be taken to ensure a complete discharge of the payor’s CLA trust obligations.

Ensuring a complete discharge of trust obligations is required to avoid obligations by a paying party to all downstream parties in the construction pyramid. This decision confirms that an owner or general contractor will be liable to a subcontractor, sub-subcontractor (or any other downstream party) if payments are not made in strict compliance with the CLA trust provisions.

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