On May 2, 2016, the Ontario Court of Appeal issued a decision in Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., 2016 ONCA 320, regarding trust actions and the right of a contractor to set off under section 12 of the Construction Lien Act ("CLA").
Provincial Store Fixtures, the builder, hired Architectural Millwork & Door Installations, the contractor, to install trim and accessories at a casino. The builder did not pay all of the contractor's invoices. The contractor brought a claim for breach of contract, but did not claim a lien or invoke the trust provisions of the CLA. The builder alleged that deficiency damages due to the contractor's defaults on other projects exceeded the outstanding invoices on the casino project, and asserted a right of set-off under section 12 of the CLA.
Part II of CLA governs trusts and gives subcontractors the right to commence an action against a contractor for breach of trust.
Section 8(1) of the CLA sets out the basic trust: all amounts received by a contractor on account of work done by its subcontractor are imprinted with a trust.
Section 8(2) of the CLA states that trust funds may not be appropriated or converted until all subcontractors are paid the amounts owing to them.
Section 12 of the CLA grants contractors the right to set-off against all projects, including unrelated projects. Under section 12, a trustee may, without being in breach of trust, retain from trust funds an amount equal to the outstanding debts of its subcontractor on the project at issue in the lawsuit, or on an unrelated project.
In order to claim a right of set-off under section 12 of the CLA, the builder must prove the existence of trust funds against which set-off can be applied. In Architectural Millwork, there was evidence that the builder received money from the owner and that the monies were not held in trust or retained at all. If no trust funds are retained and all the monies are spent, the purpose of the trust provisions is defeated and any right of set-off under section 12 is extinguished.
The availability of the right of set-off under section 12 of the CLA requires the party seeking set-off to prove specific circumstances, including the existence and retention of trust funds against which set-off can be applied. If there are no trust funds, there can be no set-off.
The best practice for contractors is to retain the trust funds in a separate account, but this is not absolutely necessary as long as the contractor can prove that the funds were retained.
The builder, Provincial Store Fixtures, was not entitled to set off under section 12 of the CLA because it failed to retain the trust monies obtained from the owner on account of Architectural Millwork's work.