While builders’ and construction lien legislation varies between British Columbia and Alberta, a common thread is the imposition of trust obligations on general contractors when they receive funds from owners under the right conditions. These statutory trust provisions are powerful legal mechanisms designed to protect subcontractors, suppliers, and professionals who contribute to a construction project, and they carry serious consequences for those who misuse or mismanage funds.
What Is a Trust and Why Does It Matter?
A trust places obligations on the trustee (in this case, the general contractor who receives funds from the owner) to hold those funds for the benefit of specific beneficiaries, such as subcontractors and material suppliers. Once a trust is imposed, the contractor is not free to use those funds as they wish—they are legally obligated to use them only for the benefit of the beneficiaries.
A breach of trust can lead to severe consequences, including personal liability for the owners, directors, and officers of the contractor’s corporation. This is true even if the funds are misused inadvertently or due to poor accounting practices.
Trust Provisions in British Columbia and Alberta
In British Columbia, Section 10 of the Builders Lien Act provides that when an owner pays a general contractor, a portion of those funds is held in trust for unpaid subcontractors and suppliers who contributed to the project. This trust arises throughout the life of the project, not just upon completion, and applies to all funds received that are owed to downstream parties.
Alberta’s legislation is limited in scope. Section 22 of the Prompt Payment and Construction Lien Act establishes that once a certificate of substantial performance is issued, any payment from an owner to a contractor is held in trust for subcontractors and suppliers. Unlike British Columbia, Alberta’s statutory trust obligations arise only after substantial completion.
In both provinces, trust provisions exist to prevent the misapplication of funds and protect unpaid contributors from insolvency or mismanagement by general contractors.
While this article only discusses statutory trusts resulting from builders’ lien legislation, trusts may arise in other ways, such as via contract or in equity.
How Breaches of Trust Occur
Three conditions generally give rise to a breach of statutory trust:
- the general contractor receives funds from the owner with trust obligations attached;
- the contractor owes money to subcontractors, suppliers, or professionals; and
- the contractor uses the funds for something other than paying those debts.
Common breaches occur when a general contractor receives funds from an owner and uses them for a purpose other than paying the subcontractors or suppliers to whom the funds are owed. This includes paying themselves first, using the funds to cover general overhead, or applying the money to unrelated projects. There is no requirement of malicious intent, many breaches occur due to carelessness or poor accounting practices.
The Risk of Co-Mingled Funds
A potentially dangerous practice for a general contractor is using a single bank account for multiple projects. Co-mingling of trust funds itself is not automatically a breach of trust, provided the funds can be accurately traced and properly allocated. However, when accounting practices are substandard and funds cannot be clearly identified, the inability to account for trust money constitutes a breach. If a contractor is unable to provide a clear and detailed accounting of funds received and spent where trust funds are involved, a breach has likely already occurred.
Personal Liability
While incorporation generally shields directors and officers from personal liability, this protection can be lost when trust funds are mishandled. Courts have shown a willingness to impose personal liability in breach of trust claims under builders’ lien legislation, particularly when directors and officers are actively involved in financial mismanagement.
In K Bajwa Trucking Ltd. v. Power Excavating Ltd. (2021 BCSC 782), a director of a contractor was found personally liable to the extent that he was directly involved in misusing fund. Similarly, in Hub City Supplies v. Total Drywall Ltd. (1996 CanLII 3387 BCSC), the court held a general manager personally liable for breach of trust due to co-mingling trust funds, in not keeping adequate records of the receipt of trust funds and paying third parties from trust funds.
Managing the Risk
To minimize the risk of breaching trust obligations and avoid personal liability, contractors should adopt the following best practices:
- Detailed Recordkeeping
Document all inflows and outflows with sufficient detail to permit third-party audits. Accuracy is key to demonstrating compliance with trust obligations. - Prompt Payment Practices
Subcontractors and suppliers should be paid as soon as possible after funds are received. Avoid paying yourself or other non-trust obligations first. - Internal Financial Controls
Restrict access to trust funds or require multiple sign-offs or approvals for transfers. This creates a layer of protection against misuse. - Separate Project Accounts
Maintain dedicated bank accounts for each major project to eliminate confusion and ensure trust funds are not co-mingled. Separate project accounts similarly reduce the likelihood of human error contributing to a breach of trust.
The takeaway is clear: trust funds are not your money. Failing to treat them as such, whether through oversight or deliberate misuse, can have severe consequences. By understanding obligations and implementing sound financial controls, general contractors can reduce risk and ensure they meet their obligations to those who build the project alongside them.
Lukas Kozak is a lawyer at Forward Law LLP in Kamloops.
