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Suppliers’ Statutory Trust Under the Construction Lien Act

The Ontario Court of Appeal has considered whether, as a means of protecting the contract price of a supplied improvement, a building supplier is entitled to the benefit of a statutorily-established trust fund under the Construction Lien Act.

Sunview Doors (“Sunview”) manufactured custom-made sliding glass doors, which it supplied to Academy Doors & Windows (“Academy”).   In turn, Academy acted as subcontractor and installed those doors in retro-fitted and renovated rental and condominium buildings.

An important element of the narrative is that while Sunview knew that the custom-coloured and custom-sized doors were intended for specific installations by Academy, it never knew the location of the installations, since Academy always picked up the doors at Sunview’s manufacturing facility.  Neither the orders by Academy nor the invoices from Sunview identified the location of the installations.

When Academy failed to pay Sunview for over $90,000 in doors it had ordered, Sunview attempted to determine the location of the doors, but Academy refused to disclose the information and actively frustrated Sunview’s other attempts.   Academy went bankrupt shortly after.  Ultimately, Sunview sued Academy for breach of contract, and for remedies for breach of trust under the Construction Lien Act.  Specifically, s. 8(1) of that Act protects the contract or subcontract price of an improvement, and statutorily creates a trust fund for the benefit of “persons who have supplied services or materials to the improvement.”  Sunview accordingly argued that it was entitled to the protection of s. 8(1) under these circumstances.

At trial, the judge did award Sunview the full amount of its claim, but declined to allow it to benefit from the statutory trust in s. 8(1) of the Act.   This is because while Academy was a subcontractor and Sunview was a supplier, Sunview’s ignorance of the location of the doors’ installation meant it could not satisfy an important requirement:  that at the time they were sold or supplied to Academy, Sunview intended that they be used for “known and identified” improvements.

This last stipulation stemmed from earlier legal judgments which considered the proper interpretation of the Act, and which the judge felt imposed a threshold test for Sunview’s recourse to the statutory trust.  

Sunview successfully appealed to the Divisional Court, and Academy appealed further to the Ontario Court of Appeal.

The Court of Appeal concluded that – contrary to the earlier case law on which the trial judge had relied – there was nothing in the wording of s. 8(1) that required that Sunview intend the material be incorporated into a “known and specific improvement” at the time of the sale to Academy.  Rather, it was sufficient for the Act’s purposes that Sunview was merely able to link the doors to the improvement for which Academy (as subcontractor) was owed money or had been paid.

After a careful review of precedent decisions together with consideration of the Act’s overall scheme, intent and historical origins, the Court of Appeal could find no authority for the proposition that the Act’s wording required Sunview to have intention or knowledge of Academy’s specific use of the doors at the time it entered into the contract to supply them.  The court said:

“Reading in a requirement that the supplier intend that the materials supplied be incorporated into a specific improvement in order for a trust to arise is not consistent with the imposition of a statutory trust.”

Therefore, as long as a link “to the improvement” could be established, then Sunview was entitled to the benefit of the s. 8(1) statutory trust.

The Court of Appeal also observed that the purpose of s. 8(1) is to create a statutory trust as a form of security, to ensure suppliers such as Sunview are paid the money they are owed by subcontractors such as Academy.  It wrote:

“The object of the Act is to prevent unjust enrichment of those higher up in the construction pyramid by ensuring that money paid for an improvement flows down to those at the bottom.”

After concluding that Sunview was eligible to benefit from the statutory trust, the Court went on to find Academy liable not only for breach of contract but for breach of trust under the Act as well.

This was allowed even though Academy had deliberately frustrated Sunview’s attempts to get information on where the doors were located and thereby establish the necessary link to the renovations.  In these circumstances, the court found that “[p]recedent, principle and policy” dictated that Academy’s conduct should not be condoned, and that its unjust enrichment at the expense of Sunview should not be tolerated. As such, the necessary link should be acknowledged in Sunview’s favour.

Finally, in light of Academy’s bankrupt status, the court found that three individual officers and directors were jointly and severally liable to Sunview for the cost of the doors.   See:  Sunview Doors Ltd. v. Academy Doors & Windows Ltd., 2010 (ONCA).