Accrued interest can form part of trust funds under Ontario's Construction Act

19 July 2021

Last month, the Ontario Court of Appeal confirmed that accrued interest can form part of the contractor's and subcontractor's trusts created by s. 8 of Ontario's Construction Lien Act, R.S.O. 1990, c. C.30 (now amended and renamed the Construction Act, R.S.O. 1990, c. C.30) (collectively, the "Act").   

In Great Northern Insulation Services Ltd. v. King Road Paving and Landscaping Inc., two suppliers (including Great Northern Insulation Services Ltd. ("Great Northern") were unpaid for goods and services supplied to a construction project.  Both suppliers registered liens, and the subsequent lien claims were tried together with a further claim against the owner by the project's contractor. At trial, Great Northern was granted judgment in the amount of approximately $105,000 against the contractor. 

The contractor's counsel subsequently brought a motion for a charging order under s. 43(1) of the Solicitors Act, R.S.O. 1990, c. S.15. The trial judge granted the charging order and provided that it would have priority over any amount that the contractor owed to Great Northern. On appeal to the Divisional Court, the charging order was varied to grant Great Northern priority over the charging order in the amount of $54,737.61 plus any interest accruing to the time of payment. 

The key point is that this $54,737.61 was what remained out of the funds that had been paid by the owner to the contractor (i.e. the remaining funds held in trust by the contractor under s. 8(2) of the Act).  Section 8(2) reads as follows:

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.

The Court of Appeal observed that since the Act is remedial legislation, it must be given a fair, large and liberal interpretation in order to achieve its objectives, which include protecting industry participants on the lower rungs of the construction ladder. Accordingly, the Court determined that a broad interpretation must be given to the portion of s. 8(2) which reads: "all amounts related to the improvement owed to them by the contractor."

The Court observed that, typically, the amount owing on a commercial contract includes interest that accrues on payments due under the contract.  Such interest is often stipulated in the contract itself or on the invoices rendered under the contract. In both cases, such interest can fall within the Act's s. 1(1) definition of "price:" "the contract or subcontract price (a) agreed upon between the parties."

In the Great Northern case, the parties had entered into a subcontract stipulating an interest rate of 2% per month on amounts outstanding after 30 days. The Court found that such interest fell under s. 8(2) as "an amount owing to a subcontractor relating to the improvement," and that, accordingly, the trial judge had no basis to place the charging order in priority to the trust funds. The interest amount was clearly protected by the trust and the Act's restrictions on the use of trust funds. 

Note that the Court's findings with respect to interest are limited to trust funds; they do not apply to construction liens. The Court observed that trust funds and lien rights "are two separate concepts under the Construction Lien Act.  Liens give subcontractors and suppliers the right to assert a claim directly against the property, whereas trusts serve to protect the interests of subcontractors and suppliers by protecting funds that are owed to, or have been received by, the contractor." 

Section 14(2) of the Act specifically provides that lien claims do not include interest, stating that:

No person is entitled to a lien for any interest on the amount owed to the person in respect of the services or materials that have been supplied by the person, but nothing in this subsection affects any right that the person may otherwise have to recover that interest.

The Court observed that while this provision excludes an entitlement to interest with respect to liens, it leaves open the possibility of other entitlements to interest, including via the Act's trust provisions. 

The bottom line is that accrued interest can form part of the s. 8 contractor's and subcontractor's trusts, provided that such interest forms part of the owing amounts related to the improvement. Accordingly, increased care should be given to whether such interest has been agreed to and to whether such interest has, in fact, accrued. Parties may also want to carefully consider the Court's finding when entering into interest arrangements in the first place.

Should you have any specific questions about this article or would like to discuss it further, you can contact the authors or a member of our Infrastructure and Construction Group.

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