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The Court of Appeal for the Province of Ontario expanded the interpretation of the breach of trust provisions contained in the Construction Lien Act. In a recent case considered by the Court, a creditor was a manufacturer of specialty doors. Its customer was a contractor and installer. The customer ordered specialty doors from the manufacturer, installed them at various construction sites, and then failed to pay the manufacturer. The customer ultimately became insolvent and any judgment obtained by the manufacturer against its customer would remain unsatisfied. The manufacturer did not register any construction liens because it did not know the location of any of the construction projects. Its customer picked up the doors at the manufacturer’s plant. The manufacturer had asked its customer for the location of the various construction projects but the customer refused to disclose them. The customer was paid for its work and hence was paid for the installation of the doors at the various construction sites. However the customer used the funds it received for purposes other than paying its creditor, the manufacturer.

In order to get paid, the manufacturer invoked the trust provisions of the Construction Lien Act. The funds received by the customer were subject to a trust in favour of the manufacturer and any other unpaid supplier. The Construction Lien Act imposes personal liability on the officers and directors of a corporation should there be a breach of trust. The manufacturer successfully sued the officers and directors of its customer for the debt owed. The officers and directors argued that the trust provisions of the Construction Lien Act did not apply because the manufacturer did not know the location of the construction projects and did not know where and when the doors were installed.

The Court of Appeal ruled that it did not matter that the manufacturer did not know the location of the construction projects. All that was required was that the customer received the doors, did not pay for them, the doors were destined for construction projects, the customer received payment, did not pay the manufacturer, and the payment received by the customer was used for purposes other than paying its suppliers. This was a breach of the statutory trust imposed by the Construction Lien Act and the officers and directors of the customer were statutorily liable for this breach of trust. The lesson to be learned is that even though a manufacturer or supplier may not know the ultimate destination of its product, it may have an action against the officers and directors of its customer, should its invoices remain unpaid, pursuant to the trust provisions of the Construction Lien Act.

Garth D. Walkden is the head of the firm's litigation department. He practices in the area of commercial litigation and construction law. He can be reached by email at walkden@kmblaw.com or at 905-276- 0419.