June 30, 2021
The Scope of Construction Trust Obligations in Ontario:
The Court of Appeal confirms that accrued interest is included at the contractual rate
It is trite to state that there is no construction lien for interest owing in Ontario, pursuant to s. 14(2) of Ontario’s Construction Act. Many might assume, accordingly, that interest owing on a construction debt cannot be claimed against the construction trust created by of Part II, of the Act. Such an assumption would be incorrect.
As Justice Corbett held on behalf of a panel of Ontario’s Divisional Court in Great Northern Insulation Services Ltd. v. King Road Paving and Landscaping Inc., 2019 ONSC 3671, at para. 40,
“Interest on trust funds is impressed with the same trust as the trust funds themselves. This would be a rather obvious point but for the confusion that arises when lien rights and trust rights are conflated.”
The Divisional Court’s decision in Northern Insulation was recently upheld by Ontario’s Court of Appeal (2021 ONCA 367), where Justice Nordheimer held for the Court (at para. 17-21):
… the interest amount in this case was expressly provided for by the contractual arrangements between the parties.
Thus, interest reasonably falls within the scope of s. 8(2) as an amount owing to a subcontractor relating to the improvement. Interest owing is therefore part of the trust fund created by s. 8(1) and falls directly within the restrictions on the permissible use of those trust funds stipulated by s. 8(2).
I would add, on this point, that we are not speaking here about lien rights. We are speaking about trust funds. The two are 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. Actually, the Construction Lien Act provides expressly that interest is not part of the lien claim in s. 14(2), which reads:
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. [Emphasis original to Court of Appeal]
No such exclusion is contained in s. 8. While Great Northern would not have been entitled to include the interest amount within its lien claim, there is no principled reason to exclude interest from the trust fund provisions, absent the legislation so providing. Excluding interest would also be inconsistent with the object of the legislation …
Ontario claimants should keep the above in mind. Given that contractual rates of interest can greatly exceed those provided for under Ontario’s Courts of Justice Act, and given the amount of time that can be spent obtaining a judgment from breach of trust, the interest component of a claim can easily exceed the base claim itself. Further, in an insolvency circumstance the trust entitlement will in many circumstances take priority over the entitlements of other creditors, whereas non-trust entitlements will not. Claimants may accordingly wish to pursue both lien and trust claims where the debtor is insolvent, because the lien claim (as above) will not include for interest.
Kennaley Construction Law
This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.