Canada: Personal Liability And Construction Ladder

Last Updated: March 9 2015
Article by Jonathan Speigel

Consider two scenarios. First, a general commences an action against a corporate sub for breach of contract, obtains a judgment, and then realises that the sub has no money and no assets and that the judgment is no more than a worthless piece of paper. Second, an owner retains a corporate contractor to build a home, pays the contractor money in advance, ultimately fires the contractor because the contractor is incompetent, obtains judgment against the contractor, and, again, realises that the judgment is not collectable. In each of these scenarios, the wronged party needed to obtain a judgment against the individuals behind the corporations. Sometimes, this can be done – and there are numerous ways to do it; sometimes, this cannot be done.

In Haebler Construction (2003) Inc. v. Condura Forming, a 2014 British Columbia Supreme Court decision, the general attempted to obtain a judgment against the principal of the sub by claiming reliance on a false statutory declaration. In Bridgmohan v. 2218667 Ontario Ltd., a 2014 Ontario Superior Court of Justice decision, a homeowner attempted to obtain a breach of trust declaration against his contractor.

Haebler

This was a classic case of a corporate subcontractor who did not have the resources to finish a project because he was robbing Peter to pay Paul. The court found that, notwithstanding the sub's conspiracy allegations against the general, the sub lacked the cash flow to keep ahead of its obligations and was using payments from the general to cover liabilities under a previous contract. Accordingly, the sub was unable to meet its obligation on the current project to its subsubs, its employees, and CRA.

In its desperate attempt to get cash, the sub front-end-loaded its statement of values and attempted to obtain progress payments for a higher percentage of work completed on the project than had actually been completed. The general agreed to pay the sub bi-weekly, rather than monthly, but otherwise refused to accede to the sub's ploy, much to the sub's dismay.

Within a few months, the general started to receive complaints from subsubs that the sub had not been paying them. The general then started paying joint cheques to ensure that subsubs were paid.

In a bewildering turn of events, the sub advised CRA that it should garnish the general. CRA notified the general that the garnishment was coming. The general realised that if progress payments were garnished, the sub would be unable to pay its subsubs, liens would be registered, and the subsubs would withdraw their services. The general therefore took over the subcontract, retained the sub's forces itself, and completed the sub's work.

Damages

The general claimed $119,000 against the sub for the difference between its cost of finishing the subcontract work and  the unpaid balance of the subcontract price. As it happened, the general did not actually incur this deficiency because, although it had a lump sum stipulated price contract with the sub, it had a cost plus contract with the owner. Regardless, the subcontract stated that the general was entitled to claim this amount for damages and, in any case, the general stated that it would be reimbursing the owner for all damages that it recovered in the action.

The judge awarded $104,000, reducing the amount claimed by $15,000, which was the amount that the general claimed for its own mark-up for finishing the work. The judge deducted this amount because the general was able to charge the mark-up to the owner.

This makes no sense to us. If the general was able to charge the cost to the owner, and still be reimbursed by the sub, why should it not be reimbursed for its mark-up on that cost? Instead of the sub carrying out all the supervisory work, the general had to do it; instead of the sub ordering materials, the general had to do it. Why would this work not be part of the general's damages?

Principal

The general's lawyers, knowing from the start that the sub was in dire financial straits, included a claim that the sub's principal made fraudulent or negligent misrepresentations in his statutory declarations. He had declared that the sub had been paying all of its subsubs when it had not been. The general alleged that had it known that the sub had not been paying its subsubs, the general would have terminated the subcontract long before it did and its damages would have been substantially less.

For its misrepresentation claim, the general had to prove that the principal's statutory declarations were false; the principal knew that they were false or made them recklessly; the principal intended that the general act on the representations; the general was induced to act in reliance on the false statements;  and the general suffered damages as a result.

The claim foundered because the general did not rely on statements from the principal that the sub had paid all of its project debts and obligations; the general knew, almost immediately, that the sub was not paying its subsubs.

Trust

The general also claimed that the principal participated in a breach of the trust obligations contained in the British Columbia Builders Lien Act. This claim was absolutely correct; the sub did breach its trust obligations to its subsubs and the principal would, accordingly, be liable to the subsubs for that breach. However, the subsubs and suppliers (i.e. the persons below the sub on the construction ladder) were the beneficiaries of the trust, not the general; the general was above the sub on the construction ladder. The general argued that because the subsubs had not pursued the sub for breach of trust, the general could stand in their shoes and do so as the settlor of the trust. The judge rejected this argument; without an actual assignment of a claim from a subsub to the general, the general could not stand in anybody's shoes.

Upshot

After a 13-day trial, the general has a judgment against the corporate sub, which seemingly will not be paid, and has no means to collect the judgment debt against the sub's principal.

Bridgmohan

A trusting homeowner paid an unscrupulous contractor 30% of the contract price before the contractor even set foot on the property. The contractor commenced some of the work, but did it so poorly that the owner terminated the contract. The owner brought an action against the contractor for return of the money it had paid, given that the contractor's work was useless.

Claims

The contractor was not incorporated. An individual carried on its business under a name and style. Accordingly, the individual was held personally liable to return the funds to the homeowner.

The homeowner also tried to obtain a declaration that the failure to repay the funds constituted a breach of the trust fund provisions of the Ontario Construction Lien Act. We assume that the homeowner wanted the declaration as ammunition to use in case the individual went bankrupt. The judge refused that request. He noted that there was no indication of a breach of trust to the contractor's beneficiaries (i.e. its subcontractors and suppliers). The judge also noted that there was no trust, going up the construction ladder, in favour of the owner who contracted with the contractor.

The homeowner also attempted to obtain a declaration that the judgment debt would survive the individual's bankruptcy. The judge refused this request as well. He held that a court ought not to make a ruling regarding a claim or judgment surviving bankruptcy in advance of any actual bankruptcy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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