Seeking payment for work completed from directors and shareholders of a company that has experienced financial failure is a tough strategy to follow.
However, that didn’t stop a Surrey, B.C., company. The problem was that they lacked evidence to prove their case.
Metro-Can Construction had been contracted by developer Alderbridge Way Limited Partnership for excavation and civil works related to a mixed-used development in Richmond, B.C. When Alderbridge became insolvent and sought creditor protection, it left unpaid $6.6 million previously invoiced by Metro-Can.
Metro-Can sought judgment against Alderbridge and its directors, investors and shareholders for about $8.6 million, including damages for negligent misrepresentation and breach of trust.
As outlined by Edward Lynde, partner with Fasken Martineau DuMoulin LLP, and associate Anna Lu, Metro-Can alleged that payment holdbacks held by Alderbridge were subject to a statutory trust, as per the British Colombia Builders Lien Act. It also claimed Alderbridge had directed and facilitated the payment of the holdbacks to parties who were not beneficiaries. Knowingly assenting to or directing these actions should be regarded as a breach of trust.
Proving allegations of breach of trust and unjust enrichment requires strong evidence and Metro-Can fell well short.
The Court expressed some empathy for Metro-Can’s situation, but quickly moved on to its reasoning for dismissing the claims entirely.
“This is a case where a contractor has unfortunately not been paid for all of the work it completed, and it is attempting to shift liability from the party it contracted with to that party’s directors and shareholders,” wrote Justice Majawa. “However, there is no basis in the law, or in the evidence before me, to hold any of the applicants liable for the alleged wrongdoing of Alderbridge.”
“The Court found that the evidence relied upon by Metro-Can Construction consisted of mere ‘suspicions and conjecture,’ and that Metro-Can Construction failed to include any particulars regarding the alleged misrepresentations,” Lynde and Lu told the Daily Commercial News. “Moreover, the Court dismissed the Metro-Can Construction allegations regarding breach of trust and unjust enrichment on the basis that no reasonable cause of action was disclosed and no genuine issue for trial existed.”
Metro-Can then decided to amend and reaffirm its pleadings, repeating allegations regarding misappropriation of funds and fraudulent misrepresentation. Once again, there was no evidence to support these serious claims. As a result, the Court awarded costs, including special costs, to Alderbridge.
How would this case in British Columbia relate to a similar claim action in Ontario?
“In Ontario, statutory trusts under the Ontario Construction Act can be an extremely powerful remedy for contractors, subcontractors and suppliers looking to enforce payment obligations with those they have directly contracted,” Lynde and Lu said.
“In the construction pyramid, anyone who received payments from the party above them is considered a ‘trustee,’ responsible for safeguarding those funds on behalf of those lower in the pyramid who are the designated ‘beneficiaries’ of such entrusted funds. Consequently, the statutory trusts serve to ensure that payments from owners, contractors and subcontractors flow properly to the appropriate beneficiaries, without any unauthorized diversion of funds.”
Going this route could be effective in piercing the “corporate veil,” and potentially expose those in control of a corporation like officers and directors to liability. It could also follow that someone in such a control position, who knowingly received or applied the trust funds or property for their own benefit, could be found liable for breach of trust, they said.
As unappreciated and underutilized a solution such claims against a statutory trust might be, Lynde and Lu emphasized the critical matter of evidence.
“The remedy is rendered virtually meaningless unless there is sufficient evidence to support the same. Claims that are based merely on suspicion and conjecture will almost certainly be doomed for failure, and asserting serious allegations without evidence will likely attract potentially significant cost consequences.”
In conclusion, Lynde and Lu reiterated, “Allegations remain allegations until otherwise proven.” Success in court is linked to the strength and quality of evidence.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.
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