Expanded Common Law Trust obligations obstructing timely payment of construction debts
December 21, 2015
We were recently presented with a file where our client obtained judgment against a Defaulting Contractor and commenced enforcement steps, by way of issuing garnishments to various owners that employed the Contractor.
With respect to one garnishment, the Owner acknowledged that monies were due and owing under the contract but refused to pay because of sections 15 and 77 of the Construction Lien Act (the “Act”).
The Act stipulates that a lien arises and takes effect when a party first supplies services or materials to the project. That is to say, the lien exists prior to its registration. Pursuant to s.77 of the Act, the lien will have priority over any garnishments, judgments, executions etc. which arose after the lien. On this basis, the Owner refused to abide by the Garnishment, however, the Owner withheld the funds from the Judgment Debtor, thereby preventing the debtor from paying the money to our client.
In an attempt to resolve this issue, we obtained an acknowledgment and Direction from the Judgment Debtor, directing payment from the Owner. Again, the Owner refused to pay; this time citing the controversial decision of Robert Nicholson Construction Company Limited v. Edgecon Construction Inc., 2015 ONSC 1237 (“Edgecon”).
In Edgecon, during the course of a Project, the Debtor directed the Owner to make payment to a third party for work performed by the Debtor pursuant to the contract. Although this third party was not part of the construction pyramid for the project, the Owner complied with the direction.
Subsequently, a Creditor emerged and issued a garnishment on the Owner. The Owner refused to pay on the basis that payment had already been made to the Debtor by virtue of the directed payment to the Third Party.
The Court held that as the Third Party was not part of the construction pyramid, the payment was not in compliance with the trust provisions of the Act and as such, the Owner was held liable to pay the Creditor.
The difficulty with the Edgecon decision is that Justice King has effectively expanded statutory obligations of a trustee under the Act. Previously only parties with privity of contract were able to pursue breach of trust actions under the Act. However, the trust obligations in this case were expanded to parties further down the construction pyramid who did not have privity of contract with the Owner. This is a departure from prior decisions and complicates matters by creating relationships which never previously existed.
Acknowledgments and Directions are commonly used in the construction industry as simple method for securing repayment of debts. The legal commentary seems to unanimously agree that the decision in this case is the wrong one, both practically and legally. Unfortunately, we have already encountered one owner who is relying on this decision and fear that more may follow suit. It is our understanding that this decision is under appeal, and we are hopeful this matter will be corrected if that is the case.
Nonetheless, despite difficulties raised by the Edgecon decision, there are options to consider in trying to work with and around this case. For further information, please contact Daniel Resnick at Koskie Minsky LLP at 416 542 6299.