Construction Trusts. Duncan W. Glaholt. Part II - Trusts. s. 7 - Owner’s trust s. 8 – Contractor’s trust s. 9 – Vendor’s trust s. 10 – Discharge s. 11 – Reduction s. 12 – Retainage s. 13 -. Part II - Trusts. s. 7
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Duncan W. Glaholt
(1) Subject to Part IV, a trustee who pays in whole or in part for the supply of services or materials to an improvement out of money that is not subject to a trust under this Part may retain from trust funds an amount equal to that paid by the trustee without being in breach of the trust.
(2) Subject to Part IV, where a trustee pays in whole or in part for the supply of services or materials to an improvement out of money that is loaned to the trustee, trust funds may be applied to discharge the loan to the extent that the lender's money was so used by the trustee, and the application of trust money does not constitute a breach of the trust.
In addition to the persons who are otherwise liable
in an action for breach of trust under this Part,
(a) every director or officer of a corporation; and
(b) any person, including an employee or agent of the
corporation, who has effective control of a corporation
or its relevant activities,
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 is liable
for the breach of trust.
The question of whether a person has effective control of a corporation or its relevant activities is one of fact and in determining this the court may disregard the form of any transaction and the separate corporate existence of any participant.
Every one who, being a trustee of anything for the use or benefit, whether in whole or in part, of another person, or for a public or charitable purpose, converts, with intent to defraud and in contravention of his trust, that thing or any part of it to a use that is not authorized by the trust is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen years.
Minneapolis-Honeywell Regulator Co. v. Empire Brass Manufacturing Co.
 3 D.L.R. 561 (S.C.C.)
Monies payable by an owner to a contractor are deemed to have been received by that contractor.
Banks’ Liability for breach of trust
Is thebank liable for breach of trust?
The bank is a stranger to the trust and can only be liable if it is a party to a breach of trust by someone who is a trustee, i.e. their customer
The bank knew its customer was a contractor
Was this enough to fix it with liability for breach of trust?
With a strong dissent by Justice Locke: NO
(a middle ground)
The Overhead Cases
(1998), 42 O.R. (3d) 292
(1999), 42 O.R. (3d) 749
(2000), 50 C.L.R. (2d) 224
NO, and NO again!
Affirms Rudco & Dietrich, without much discussion
1. Don’t even think about it!
2. Most contractor operate in breach of trust every day anyway.
(1996), 29 O.R. (3d) 129(Ont. Gen. Div.)
(2000), 2 C.L.R. (3d) 58 (Ont. S.C.J.)
“I am satisfied that the authorities on this issue are clear, and I agree, that a failure to set up a proper system to receive, monitor and disburse trust funds is sufficient, in and of itself, to constitute a breach of trust. Indeed, a trustee need not intend to breach the trust nor must he or she act fraudulently in order to be found liable for the breach of trust. The law, in my view, is clear, a breach of trust occurs if the trustee carries on business through one general operating account into which trust moneys are deposited and are thereby intermingled with non-trust funds;
“if the trustee keeps inaccurate or incomplete records with respect to the receipt and disbursal of funds; and, generally, if the trustee deals with trust funds in a manner inconsistent with the trust. Moreover, in these circumstances, even ‘hard working, sincere people who tried to do the best they could in all the circumstances’ will be found liable for breach of trust.”
The Act contemplates a separate trust fund for every project in which the contractor is involved and separate accounting for every trust fund. It is only by separately accounting for the moneys held in trust that a contractor can ensure that trust moneys are not in fact applied to other purposes. The fact that the Act does not expressly require that trust funds be kept separate from the general accounts of the contractor is not determinative of whether a failure to do so constitutes a breach of trust. A trustee has an obligation to protect the trust funds. Allowing trust funds to be intermingled with other moneys and used for general purposes is inconsistent with the trustee's duty to maintain proper control of the trust funds.
“While it is true that s. 8 does not prohibit the commingling of trust funds with other funds, the weight of the case law seems to be to the effect that commingling places the trust funds at risk, and merely exposing them to that unnecessary risk is an act which is inconsistent with the high standards expected of a trustee. The fact that, in the end, the risk is not realized is immaterial - good luck should not be a defence to a breach of trust.”
Structural Contractors Ltd. v. Westcola Holdings Inc. (2000), 48 O.R. (3d) 417 (Ont. C.A.)
The appellants argue that the same considerations do not apply to s. 7, particularly where the funds are received on account of rent, without which the owner would be unable to provide the services required by its lease obligations. I do not see how this submission can prevail given the language of s. 7(4).
That argument must be rejected. Westcola is essentially a landlord. Rent is not an incidental matter to it. Rent is its lifeblood, its raison d'être. To exclude rent from the trust in the case of a landlord would be to exclude Westcola from the application of s. 7. No justification has been suggested for such a step.
1. Statutory amendment to require separate trust accounts?
2. Another option:
(a) detailed accounting of trust assets receivable (names, addresses, amounts, dates)
(b) detailed accounting of trust accounts payable
(c) detailed accounting of trust accounts received
(d) detailed accounting of trust accounts made