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What do contractors need to know about construction fund trusts
It is imperative that Contractors fulfil their obligations.

What do contractors need to know about construction trust funds?

The Construction Act, R.S.O. 1990, c. C.30 (the “Construction Act”) imposes substantial obligations and limitations upon both Owners and Contractors when it comes to their handling of monies received in relation to a construction project.  A failure to comply with such obligations and limitations will give rise to substantial liability. As such, it is imperative that Contractors fulfil their obligations.

The Trust

Subsection 8(1) of the Construction Act provides that all amounts (i) owing to a contractor, whether or not due or payable, or (ii) received by a contractor on account of the contract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to a project who are owed amounts by the contractor.   

In simpler terms, any monies owing to or received by a Contractor (i.e., the trustee) on account of goods and services supplied to a project are deemed to be held in trust for the benefit of Subcontractors and Suppliers (i.e., the beneficiaries) who have supplied goods and services to the project.

The Contractor’s Use of Trust Funds

Subsection 8(2) of the Construction Act provides that a Contractor is not allowed to repurpose any of the trust funds until all subcontractors and other persons who supply services or materials to the project are paid all amounts related to the improvement owed to them. However, Section 10 of the Construction Act provides that, every payment made by a Contractor to a subcontractor who has supplied goods and services to a Project discharges the trustees’ obligations to the extent of the payment made.

For example, if a General Contractor enters into a contract with an Owner whereby they agree to complete a construction project for $250,000.00, they cannot use or appropriate such funds until all Subcontractors and suppliers have been paid. Simply said, the General Contractor cannot recover its profits or pay any overheard expenses from the monies received until all of the Subcontractors and suppliers have been paid. With that being said, Section 10 of the Construction Act allows a Contractor to pay the Subcontractors for goods and services supplied to the Project without breaching its obligations.

The Contractor’s Obligation to Account  

As of July 1, 2018, the trust provisions of the Construction Act were amended to require that:

  • the trust funds be deposited into a bank account in the name of every trustee;
  • the trustee(s) maintain written records respecting the trust funds and detailing the amounts received, paid out, and any transfers made for the purposes of the trust; and
  • if trust funds from more than one trust are deposited into a single account, the trustees maintain separate records for each trust. 

The majority of the changes to the Construction Act’s trust provisions were simply the legislation of the obligations already imposed under the relevant case law. However, the legislation of such requirements further establishes a concrete burden being placed on all Contractors.

Failure to Maintain Trust Funds or Account

The next question to be answered is, what are the consequences if a Contractor fails to maintain trust funds or provide a proper accounting?

In addition to providing the Subcontractors with the ability to trace the Trust Funds, the Construction Act also imposes personal liability upon:

  1. the officers and directors of the Contractor; and
  1. any person who has effective control of the Contractor or its relevant activities,

if they assented to or acquiesced in any conduct that he or she ought to have known amounted to a breach of trust.   

In considering these consequences, it is important to note that the Court has provided that, when advancing a claim for breach under the Construction Act, a Subcontractor must only prove that (i) they are owed monies by the Contractor on account of goods and services supplied to the Project; and (ii) the Contractor has received payment from the Owner. Once this is established, the burden will then be upon the Contractor to prove that they distributed the Trust Funds as permitted by the Construction Act. The Contractor must be able to provide a proper accounting of the funds received from the Owner and show that they were not converted or appropriated in contravention to the trust. If the Contractor cannot account for such funds, they will be deemed to have breached the trust, thus potentially imposing personal liability upon the various individuals detailed above.

Final Thoughts

Although required on all projects, Contractors will want to ensure that they maintain proper records on larger projects where they could face potential cash flow issues if the project goes south. Specifically, Contractors should:

  1. Open a separate bank account for each project;
  • Emphasize that their bookkeepers or accounting departments maintain detailed and precise records of all funds received, paid out and/or transferred; and
  • Prior to recovering its profits or overhead expenses, apply all monies received from an Owner to the payment of Subcontractors and Suppliers.

A failure to do so could give rise to unexpected consequences for not only the Contractor, but other individuals involved.

If you have questions about your legal obligations under the Act, or you believe that you’ve been involved with or subject to a breach of trust, our construction lawyers are here to help. We will be happy to help review your situation and work with you to explore your options about how to move forward. Contact our office today to set up a consultation.