The Ontario Superior Court of Justice recently delivered a strong reminder of the strict scope of trust obligations under the Construction Act. In a summary judgment decision, the Court not only held a contractor liable for unpaid invoices, but also imposed personal liability on its directors for commingling trust funds with general operating funds and failing to maintain a separate trust account.
Among the key “modernization” reforms introduced through Ontario’s 2018 amendments to the Construction Act were enhanced accounting obligations governing the handling of trust funds by contractors and subcontractors.[1] These obligations require, among other things, that trust funds be deposited into a separate account in the trustee’s name and that proper records be maintained regarding the receipt and disbursement of those funds.[2] The scope of liability under these provisions continues to evolve through judicial interpretation.
In Morin Bros. Building Supplies Inc. v Bond Group Ottawa 2018 Inc., 2025 ONSC 5561, the Court clarified several important aspects of sections 8 and 13 of the Construction Act and signalled a willingness to take an expansive approach to statutory trust compliance.
The Key Takeaways from the Decision
1. Commingling Trust Funds May Constitute a Breach of Trust Obligations
The Court held that depositing trust funds into a general operating account from which the contractor paid subtrades, suppliers, overhead expenses, and general business costs constituted a breach of the statutory trust provisions, notwithstanding that the contractor maintained accounting ledgers on a project-by-project basis.
The decision suggests that maintaining internal accounting records alone may not be sufficient to satisfy section 8.1 of the Construction Act. Instead, the Court appeared to require a separate trust account dedicated to trust funds, together with project-specific records tracking the receipt and disbursement of those funds.[3] This interpretation arguably expands the practical scope of section 8.1, which provides only that trust funds must be deposited “into a bank account in the trustee’s name” and that the trustee maintain written records respecting receipts, disbursements, and transfers.
Contractors who continue to deposit project funds into general operating accounts without maintaining separate trust accounts and sufficiently detailed project-based records may face increased exposure to statutory trust claims and potential personal liability.
2. Misallocation of Payments Does Not Defeat a Trust Claim
The Court also addressed the allocation of payments between debtors and creditors. At common law, a debtor may direct how a payment is to be applied, including whether it is to reduce principal or interest, and a creditor generally must respect that direction where there is a “plain and irrevocable expression of intention.”[4]
However, the Court held that a supplier’s improper allocation of project-specific payments did not extinguish its trust claim under the Construction Act. Rather, any improper allocation was relevant to the calculation of damages, not to the existence of the trust claim itself. The court essentially preserves the underlying statutory trust remedy even where accounting disputes arise regarding the allocation of payments.
3. Contractual Interest Forms Part of the Trust Fund
Section 8(1) of the Construction Act provides that all amounts owing to, or received by, a contractor or subcontractor on account of the contract or subcontract price of an improvement constitute trust funds for the benefit of subcontractors and other persons who supplied services or materials to the improvement and remain unpaid. Section 8(2) of the Construction Act requires contractors and subcontractors, as trustees of construction trust funds, to preserve those funds and prohibits their use for any purpose inconsistent with the trust until all subcontractors and suppliers connected to the improvement have been paid.
The Court confirmed that contractual interest payable under a Credit Agreement and owing to a subcontractor formed part of the trust fund created by section 8(1). The Court rejected the argument that interest should instead be limited to the default prejudgment interest provisions under the Courts of Justice Act. As the Court explained (at para. 139):
“… although s. 8 creates a statutory trust and liability arises upon its breach, the interest on what is owed to the subcontractor or supplier accrues according to the contract. Bond Group’s argument confuses the timing of the breach of trust with the amount owing to the subcontractor or supplier under s. 8(2).”
The decision therefore confirms that contractual interest rates (rather than statutory prejudgment interest rates) apply to construction trust claims, potentially increasing exposure significantly where commercial agreements contain higher interest provisions.
Facts
The case arose from the supply of construction materials by Morin Bros. Building Supplies Inc. (“Morin Supply”) to Bond Group Ottawa 2018 Inc. (“Bond Group”) for three Ottawa construction projects: Wateridge Flats Block 3, Wateridge Flats Block 5, and Witherspoon Building Units A/B.
The parties entered into a Credit Agreement in 2019, executed by Maria and Tony Marcantonio, the sole officers and directors of Bond Group, who also provided personal guarantees. The agreement imposed interest at a rate of 25.5% per annum, compounded monthly.
Although Bond Group received project funds from the owners of the Wateridge and Witherspoon developments, it failed to fully pay Morin Supply for materials supplied to those projects. Bond Group made partial payments and expressly allocated them to specific invoices. Morin Supply later reallocated those payments to older outstanding invoices, including invoices relating to an unrelated project known as the Bloomington Project.
Morin Supply subsequently commenced an action against Bond Group for unpaid invoices and breach of trust under the Construction Act.
Decision and Analysis
The Court granted summary judgment in favour of Morin Supply, holding that Bond Group was liable for both the unpaid invoices and breach of its statutory trust obligations under the Construction Act.
Justice Rees found that Bond Group failed to comply with the accounting and trust preservation obligations introduced under section 8.1 of the Construction Act. In particular, Bond Group failed to maintain records of the receipt and disbursement of trust funds for each project, failed to maintain a separate trust account, and improperly commingled trust funds with general operating funds. The Court emphasized that maintaining project-specific accounting ledgers alone was insufficient to satisfy the statutory requirements.
As the Court explained:
[113] … Despite asserting during cross-examination that it keeps records of the receipt and distribution of trust funds for each project, Bond Group has not provided any records to substantiate this. What’s more, the company has not offered any evidence showing that the funds received for the Wateridge Flats and Witherspoon projects were used in keeping with its trust obligations.
[114] Moreover, Bond Group admitted on cross-examination that it failed to maintain a separate trust account for trust funds, as required under s. 8.1 of the Construction Act. Rather, it comingles monies received in trust on projects with other monies in its general chequing account. Although Bond Group keeps an accounting leger on a project-by-project basis, the trust funds are deposited in its general chequing account from which it makes payments to subtrades and suppliers, company business expenses, and Bond Group’s overhead expenses.
The Court further held:
[115] I find that Bond Group’s failure to maintain a trust account is a breach of its trust obligations under s. 8.1 of the Construction Act. (emphasis added)
The decision is notable because section 8.1 does not expressly require a “separate trust account.” Rather, the provision states only that trust funds must be deposited into “a bank account in the trustee’s name” and that records be maintained respecting receipts, disbursements, and transfers. The Court nevertheless interpreted the provision as requiring segregation of trust funds from general operating funds.
This appears to depart from Ekum-Sekum Incorporated c.o.b. as Brantco Construction v Lanca Contracting Limited,[5] where the Court found no breach of trust despite funds being held in a general account, provided they were separately tracked in the accounting records. The court held that Section 8.1 permits such commingling if proper records are maintained.
The Court also addressed the allocation of payments. Bond Group had specifically directed that certain payments be applied to particular invoices, but Morin Supply subsequently reallocated those payments to older debts. The Court held that the reallocation was improper because, at common law, a debtor is generally entitled to direct how payments are to be applied. However, the Court clarified that an improper reallocation does not defeat an otherwise valid trust claim; rather, it must be addressed in the damages calculation. The Court explained:
[122] As discussed, I have found that Morin Supply had no right to reallocate payments to invoices contrary to Bond Group’s direction. But I disagree, as a finding of fact, that Bond Group stopped payments because Morin Supply was misallocating its trust fund payments to the Bloomington Project. The record does not support this. Rather, the evidence is clear that Bond Group was unable to meet its payment obligations to Morin Supply regardless of the latter’s misallocation. This went on for several months, and Bond Group repeatedly acknowledged the amounts owing. Instead, it was only after Morin Supply’s lawyer made a formal demand for payment that Bond Group raised the issue of misallocation under the statutory trust provisions of the Construction Act.
[123] Further, Morin Supply’s misallocation of project-specific payments is not a basis to deny the latter relief. The issue is whether Bond Group complied with its obligations as a trustee under s. 8(2) of the Construction Act. How Morin Supply allocated payments made to it by Bond Group, and what Morin Supply did with those payments, does not bear on whether Bond Group itself properly used and paid out the trust funds that it received on the Wateridge Flats and Witherspoon projects.
[124] Thus, I reject Bond’s argument. Morin Supply did not “manufacture” a trust claim nor does Morin Supply’s misallocation of payments defeat its trust claim. (Emphasis added)
Importantly, the Court confirmed that contractual interest forms part of the trust fund under section 8 of the Construction Act. In determining the scope of recoverable interest, Justice Rees departed from a 2022 decision[6] that applied the statutory interest rate to trust claims and instead preferred an earlier 2021 authority holding that contractual interest governs.[7] Accordingly, the Court applied the contractual interest rate of 25.5% per annum to both the breach of contract and breach of trust claims.
The Court further reaffirmed the longstanding common law principle that, absent an agreement to the contrary, payments received by a creditor are first applied toward accrued interest before principal. Thus, Bond Group’s argument that certain invoices had been fully paid failed because it did not account for the substantial contractual interest owing under the Credit Agreement. [8]
Finally, the Court held Maria and Tony Marcantonio personally liable under section 13 of the Construction Act. As directors who actively participated in Bond Group’s financial management and acquiesced in the breach of trust obligations, they were found jointly and severally liable.
[1] Ted G. Betts, Gowling WLG LLP, “Time to mind the gaps: What lenders need to know about the new Construction Act (Ontario)” (October 30, 2019) <https://gowlingwlg.com/en/insights-resources/articles/2019/ontario-construction-act-what-lenders-should-know>
[2] Construction Act, R.S.O. 1990, c. C.30, s. 8.1.
[3] This decision appears to depart from Ekum-Sekum Incorporated c.o.b. as Brantco Construction v Lanca Contracting Limited, 2023 ONSC 7535 at para. 62, where I.R. Smith J. found no breach of trust despite funds being placed in a general account, provided they were separately tracked for each project in Lanca’s accounting records, as permitted by s. 8.1 of the Act.
[4] Colautti Construction Ltd. v Ashcroft Development Inc., 2011 ONCA 359 at paras. 55-56.
[5] Ekum-Sekum Incorporated c.o.b. as Brantco Construction v Lanca Contracting Limited, 2023 ONSC 7535 at para. 62.
[6] Pylon Paving (1996) Inc. v Beaucon Building Services Inc., 2022 ONSC 3282, 35 C.L.R. (5th) 273.
[7] Morin Bros. Building Supplies Inc. v Bond Group Ottawa 2018 Inc., 2025 ONSC 5561, paras. 132-138. See Great Northern Insulation Services Ltd. v King Road Paving and Landscaping Inc., 2021 ONCA 367.
[8] Morin Bros. Building Supplies Inc. v Bond Group Ottawa 2018 Inc., 2025 ONSC 5561, paras 78-79.
