The Ontario Court of Appeal recently considered the scope of the right of set-off under the trust fund sections of the Ontario Construction Lien Act (the Act) and under equitable set-off under a contract claim.

In Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., the Court of Appeal held that the owner could not rely on the trust fund set off provisions contained in section 12 of the Act because neither party was relying upon the Act, nor had they proven that trust funds were in existence. The defendant contractor could not assert an equitable set-off because the claims allegedly resulting in the set off arose on other projects and did not qualify as equitable set-offs.

Effectively, the Court of Appeal proceeded on the basis that the right of set-off under the trust fund sections of the Act is broader than the equitable right of set-off. If so, this raises important issues about the nature of setoff in both situations.

Background

Provincial Store hired Architectural Millwork to install millwork manufactured by Provincial Store at an OLG Casino construction project. Provincial Store did not raise any complaint about Architectural Millwork’s work on the OLG Casino Project and admitted that the monies claimed by Architectural Millwork on that project were owed. However, Provincial Store claimed a right of set-off arising from claims on another unrelated construction project.

The motion judge rejected the Provincial Store’s claim for set-off and Provincial Store appealed that decision to the Court of Appeal. The Court of Appeal dismissed the appeal.

Court Of Appeal’s Decision

As it had before the motion judge, Provincial Store asserted that it could rely on the set-off provision in section 12 of the Act. That section reads as follows:

“Subject to Part IV, a trustee may, without being in breach of trust, retain from trust funds an amount that, as between the trustee and the person the trustee is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee’s favour of all outstanding debts, claims or damages, whether or not related to the improvement. (underlining added)

While the word “set-off” is not contained in section 12, the title to the section is Set-off by trustee. The section does create a sort of set-off in favour of a trustee – be it the owner, contractor, or other person down the contractual chain in a construction project – in respect of monies payable by that person under a contract to the next person down the chain – the contractor, subcontractor or supplier.

Provincial Store was saying in its argument that the monies it had not paid to Architectural Millwork on the OLG Casino project were trust monies and that, by virtue of section 12, it could set off against those monies all outstanding debts, claims or damages, including its claim against Architectural Millwork on another project. The problem was that it had not asserted that position in its pleading nor proven it with facts, and neither had Architectural Millwork. Neither had relied on or referred to the Act in their pleadings or led substantial evidence on this point. In these circumstances, the Court of Appeal held that Provincial Store could not rely upon section 12.

The Court Said:

“The availability of the right of set-off under s. 12 of the CLA requires the party seeking to exercise it to prove the existence of specific circumstances and particular considerations, including the existence of trust funds against which set-off can be applied. If no trust funds are retained or all the monies are spent, the purpose of the trust provisions is defeated and any right of set-off is extinguished. In the present case, neither party pleaded the existence or breach of a trust fund. The respondent did not assert any claim to trust funds. The appellant did not allege there was a trust fund under the CLA or at all. Rather, the appellant pleaded that it had not been paid by the owner for the work performed by the respondent and therefore had no obligation to pay the respondent’s invoices, negating the existence of a trust fund….While there was evidence from the appellant’s representative, Regina Dee, that the appellant had received monies from the owner, there was no evidence that those monies were held in trust or retained at all. In a subsequent answer to undertakings, the appellant admitted that it did not maintain a separate bank account for the OLG Brantford Casino Project….As a result, the appellant has no right under s. 12 of the CLA to set-off against the monies that it admits are owed…” (underlining added)

The Court of Appeal also affirmed the motion judge’s decision that Provincial Store could not assert an equitable right of set-off “because payment on one project was not tied to the other, funds were segregated, and the projects were undertaken at different times, in different cities and for different owners.”

Discussion

This decision underlines how broad the right of set-off is under trust fund sections of the lien statutes. The Court of Appeal effectively acknowledged that the statutory set-off right could be asserted in circumstances in which an equitable right of set-off – itself a very broad form of set-off – could not be asserted. There is no apparent limit on the right of setoff contained in the trust fund section, although the Court of Appeal did say that it does not allow the trustee “to put some or all of the trust funds retained to general use.” Apparently, Provincial Store did not argue that the set-off in section 12 should be limited to a set-off otherwise recognized in law or equity, and Court of Appeal did not place that limit the ambit to the section.

The decision also underlines the fact that if a party relies on the trust fund section, then it must make a pleading to that effect and prove the facts that establish that a trust fund exists. The Court of Appeal may have been somewhat skeptical about a contractor asserting that it owed a trust fund obligation, and then asserting rights in its favour because of that obligation. Be that as it may, the next time that a party seeks to use the trust fund right in this reverse fashion, that party would be best to allege and prove that a trust fund has actually been retained and exists.

One may wonder why a set off against statutory trust funds should be wider than the set-off allowed either at law or in equity. One would have thought that trust funds mandated to be retained by the Construction Lien Act should be more vigilantly protected than other funds, and that any right of setoff under that Act should be no wider than what the law and equity otherwise provide. But, in section 12, the legislature has said “all outstanding debts, claims or damages” whether or not they arise under the project in question, and “all” does seem to mean “all”, at least apparently under this decision. The rationale may be that, having imposed a trust fund obligation on a party to a construction project when one otherwise would not exist, the legislature felt that the trustee should be entitled to take into account any other possible countervailing obligation that the beneficiary may owe.

This decision will likely be relevant to other set-off section contained in the Act, sub-section 17(3). That section permits a set-off against the value of the lien, subject again to Part IV, being the holdback. Sub-section 17(3) uses the same words that appear in section 12, namely, “all outstanding debts, claims or damages, whether or not related to the improvement.” So it appears that the same broad effect will be given to sub-section 17(3) as the Court of Appeal has given to section 12.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, parts 4(h) and 6.

Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., 2016 CarswellOnt 6796, 2016 ONCA 320

Construction liens – trust fund obligation – set-off against trust fund obligation – equitable set-off

Thomas G. Heintzman O.C., Q.C., FCIArb                               August 7, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice , legal counsel should be consulted.