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Legal Notes: Accrued interest ruled part of trust funds under the OCA

John Bleasby
Legal Notes: Accrued interest ruled part of trust funds under the OCA

It is not uncommon for suppliers to charge customers a monthly interest for overdue account balances. This is normally shown on the original invoice and can be characterized as the proclamation, “I am not your bank.”

However, when accounts between a supplier and an owner’s project contractor become seriously overdue and a lien is registered, what happens to those interest charges? Are they collectable from any funds held in trust that have been paid by the owner to that contractor?

The case in point surrounds two suppliers left unpaid for goods and services they supplied to a project under a subcontract with King Road Paving and Landscaping Inc.

Both suppliers, one of which was Great Northern Insulation Services Ltd., registered liens. These claims were tried together, along with a further claim made by the project contractor against the owner. At trial, Northern Insulation was granted a judgment in the amount of approximately $105,000.

The interest levied by Northern on the account with King Road Paving and Landscaping was two per cent per month after 30 days, fairly typical in commercial transactions.

Matters became temporarily side-tracked by a “charging order” granted by the court. A charging order allows monies owed to lawyers to take priority over those owed to suppliers like Northern. Legal representatives must provide evidence to the court that their client cannot or will not pay their fees.

However, the charging order decision was reversed.

“On appeal to Divisional Court, the charging order was varied to grant Great Northern priority over the charging order in the amount of $54,737.61 plus interest accruing to the time of the payment,” Sahil Shoor, partner with Gowling WLG, told the Daily Commercial News

As Shoor explains, “The court found that such interest fell under Section 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.”

Shoor points out a critical portion of Section 8(2) of Ontario’s Construction Act (OCA) concerning the use of trust funds.

“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 principle behind the remedial nature of the OCA, Shoor continues, is to protect industry participants “on the lower rungs of the construction ladder” in a manner that is fair and liberal in its interpretation.

Mind you, this is all about trust funds, not liens, adds Shoor. Liens are claims against property, not against funds set up through payments to contractors to protect the interests of the subs and suppliers below them, as per Section 14(2) of the OCA.

“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,” writes Shoor, “But nothing in this subsection affects any right that the person may otherwise have to recover that interest.”

What contractors, subcontractors and suppliers should take away from this case is that interest does, in fact, form part of any monies owed by contractors for project work. Shoor suggests parties take care to note if any interest charge has been agreed to in the course of the transaction and exactly what interest has accrued if payment is overdue.

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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