Breach of trust claims offer a powerful remedy that is often underutilized. Such claims are a separate and additional option to a lien on the land and a charge on holdbacks. This week we explore breach of trust claims in more detail; particularly, in what circumstances personal liability may arise.
What Are Trusts?
During the lifespan of a construction project, the money that any party along the construction pyramid receives is deemed to go into a statutory trust.
These funds must be used solely for the purposes of paying everyone involved in the project. Owners, contractors, or subcontractors cannot use funds for their own purposes or for an alternate use of the funds (i.e. to fund their overhead, pay their bills on another project, etc.) until they have satisfied their obligations in respect of the project.
What is a Breach of Trust Claim?
Where trust funds are misappropriated there may be grounds for affected parties to make a breach of trust claim. Where that happens, the parties misusing the money can be held liable.
The key aspect of a trust claim is that, in addition to the subject corporation, directors, officers, or any other individuals with effective control of a project can be held personally liable.
Benefits of Breach of Trust Claims
There are a number of benefits to filing a breach of trust claim. A breach of trust claim:
- allows a party who is owed money to sue an individual, in addition to a corporation (which may be insolvent);
- also gives the party bringing the claim the right to trace the trust funds into any property that was purchased with the trust funds; and
- provides the party bringing the claim with a longer deadline than the deadline for filing a lien claim.
Personal Liability of Directors, Officers and Others
The ability to sue an individual behind a corporate entity, also known as “piercing the corporate veil”, has a number of significant implications.
Section 13(1) creates liability for breach of trust on the part of every director or officer of a corporation, and any person who has effective control of a corporation or its relevant activities (including an employee or agent) and who assents to, or acquiesces in, conduct that he or she knows (or reasonably ought to know) amounts to breach of trust by the corporation. The person need not know as a matter of law that that conduct amounts to breach of trust.
It is not necessary for the director, officer or controlling individual to have converted trust funds for their own use or have otherwise benefited from the breach of trust in order to be found liable.
It is not necessary to show that a director or officer had effective control of the corporation to make them liable. However, a finding of breach of trust by the corporation must occur before any finding of liability against a director or officer can be made. That said, it is not necessary to bring an action against the corporation for breach of trust.
A corporation can still be liable for breach of trust even though none of those persons in effective control is so liable.
How Can We Help?
If you have questions about breach of trust claims or would like to discuss this remedy in more detail, contact the highly experienced constructions lawyers at Duncan, Linton LLP in Kitchener-Waterloo.
Our Construction Law Group regularly counsels clients at all levels of the construction pyramid on options available to them in construction disputes. We have significant experience in both advancing breach of trust claims and in defending against these claims.
We are the oldest independent law firm based in Waterloo Region and is one of the oldest law firms in all of Ontario. Call us at (519) 886-3340 or contact us online to speak to one of our construction lawyers.