Breach of Trust as Cause of Action Includes Personal Liability of Directors For Failing to Properly Hold DepositsPage last modified: August 21 2022
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Is a Contracting Corporation Required to Operate a Trust Account For Hold Back Money?
Directors or Persons In Control of Monies Held In Trust Per the Construction Act May Be Held Personally Liable For Failing to Ensure That the Corporation Holds Such Monies Within a Separate Trust Account Rather Than Deposited and Mingled Within the Business Operating Account.
Understanding When a Director of An Incorporated Contracting Business May Be Liable For Breach of Trust
In the trades business it is common, and is legally required, that contractors paid by project owners or others further up in the hierarchy of contractors and subcontractors, among others, must keep certain holdbacks of monies as an assurance for those lower within the hierarchy. These monies are held in trust on behalf of others who are the potential beneficiaries of the monies held in trust.
The Statute Law
Interestingly, the requirement to hold back certain monies, being monies as held in trust for the benefit of others, also requires that such monies be kept in a separate trust account rather than comingled within the general operating account of the business. This mandate is prescribed as per section 8 of the Construction Act, R.S.O. 1990, c. C.30 (which was formerly known as the Construction Lien Act) wherein it is stated:
Contractor’s and subcontractor’s trust
Amounts received a trust
8 (1) All amounts,
(a) owing to a contractor or subcontractor, whether or not due or payable; or
(b) received by a contractor or subcontractor,
on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor.
Obligations as trustee
(2) The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor.
Contractor’s, subcontractor’s duties re trust funds
1. The trust funds shall be deposited into a bank account in the trustee’s name. If there is more than one trustee of the trust funds, the funds shall be deposited into a bank account in all of the trustees’ names.
2. The trustee shall maintain written records respecting the trust funds, detailing the amounts that are received into and paid out of the funds, any transfers made for the purposes of the trust, and any other prescribed information.
3. If the person is a trustee of more than one trust under section 8, the trust funds may be deposited together into a single bank account, as long as the trustee maintains the records required under paragraph 2 separately in respect of each trust.
Multiple trust funds in single account
Additionally, section 13 of the Construction Act contains provisions which state that if a corporation breaches the trust provisions established by section 8 of the Construction Act, the controlling minds of the corporation, or others who knew or ought to know of the breached trust provisions, may be personally held liable for the breach of trust by the corporation. This potential for legal liability arises whereas section 13 of the Construction Act explicitly states:
Liability for breach of trust
13 (1) 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.
Effective control of corporation
(2) 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.
Joint and several liability
(3) Where more than one person is found liable or has admitted liability for a particular breach of trust under this Part, those persons are jointly and severally liable.
(4) A person who is found liable, or who has admitted liability, for a particular breach of a trust under this Part is entitled to recover contribution from any other person also liable for the breach in such amount as will result in equal contribution by all parties liable for the breach unless the court considers such apportionment would not be fair and, in that case, the court may direct such contribution or indemnity as the court considers appropriate in the circumstances.
The Case Law
The interpretation of section 8 and section 13 of the Construction Act resulting in personal liability against a director of a corporation where the corporation comingled deposit funds within a general operating account without holding such funds within a separate trust account was stated within the case of Sawh v. Par-Tek Construction Services Inc., 2017 CanLII 53634 where it was said:
 The plaintiffs submitted that Andrew should be held jointly liable with Par-Tek for any money Par-Tek is required to return to the plaintiffs.
 Pursuant to section 13 of the CLA Andrew, as the officer and director of Par-Tek had effective control of Par-Tek at all material times and is therefore personally liable for breach of trust provisions by Par-Tek.
 The defendants have produced no evidence that they held the $15,000 in a separate trust account as they are obligated to under the law. In fact, Andrew admitted during cross-examination that he deposited the $15,000 payment into his general account and became comingled with his general funds. The money paid by the plaintiffs to the defendants constituted a trust pursuant to section 13 of the CLA.
Incorporated contracting businesses have a legal duty and obligation to retain hold back funds within a separate trust account rather than comingling the hold back funds within the general operating account of the corporation. Where the corporation fails to keep hold back funds separately, those persons who control the corporation, such as the directors, officers, and managers, as well as employees or others who knew or ought to know of the failing to keep hold back monies separate, may be deemed personally liable for such a failure.