Executive Summary: Key Legal and Evidentiary Issues

• The enforceability of a credit agreement and personal guarantees between a supplier and a construction contractor was central to the dispute.

• Allocation of payments by the debtor versus unilateral reallocation by the creditor raised issues under both common law and the Construction Act.

• The application of statutory trust provisions under the Construction Act and the contractor’s duties regarding trust funds were scrutinized.

• The appropriateness of summary judgment was considered, including whether any genuine issue required a trial.

• The calculation and application of contractual interest rates and set-off claims affected the final damages.

• Personal liability of directors for breach of trust was established due to their involvement and control over the company’s financial dealings.

Facts of the case

Morin Bros. Building Supplies Inc. (“Morin Supply”), a distributor of construction materials, entered into a credit agreement with Bond Group Ottawa 2018 Inc. (“Bond Group”), a construction contractor managed by siblings Maria and Antonio (Tony) Marcantonio. The agreement allowed Bond Group to purchase materials on credit, with Maria and Tony personally guaranteeing the obligations. Over time, Bond Group ordered supplies for several projects, notably the Wateridge Flats (Blocks 3 and 5) and Witherspoon Building Units A/B. Payments were made by Bond Group, but they directed these payments to specific invoices, while Morin Supply reallocated some payments to older, unrelated invoices, including those from a different project (the Bloomington Project).

Despite ongoing communications and partial payments, significant amounts remained unpaid. Morin Supply revoked Bond Group’s credit privileges and demanded payment for all outstanding invoices. Bond Group acknowledged some debts but insisted on payment allocation as per their remittance instructions. Disputes arose over the correct allocation of payments, the enforceability of personal guarantees, and whether Bond Group had breached statutory trust obligations under the Construction Act by failing to properly manage and account for trust funds received for the projects.

Discussion of policy terms and clauses at issue

The Credit Agreement between Morin Supply and Bond Group was pivotal. It required Bond Group to pay interest at 2% per month (25.5% per year, compounded monthly) on overdue accounts and included a personal guarantee from Maria and Tony Marcantonio for all amounts due, with an interest rate of 1.5% per month (18% per year, compounded monthly) for the guarantors. The agreement did not contain any clause allowing Morin Supply to unilaterally reallocate payments contrary to Bond Group’s instructions.

Section 8 of the Ontario Construction Act was also central, imposing a statutory trust on funds received by a contractor for the benefit of suppliers and subcontractors. The Act requires contractors to maintain separate trust accounts and written records of trust funds, and prohibits the use of such funds for purposes other than paying those who supplied services or materials to the project.

Analysis and outcome

The court found the matter suitable for summary judgment, as there was no genuine issue requiring a trial. Morin Supply was entitled to judgment for the unpaid invoices, but the court held that Morin Supply was not permitted to reallocate payments made by Bond Group to other invoices or projects. Payments had to be applied as directed by Bond Group, both under common law and the Construction Act, which specifically protects the allocation of trust funds to the relevant project.

Interest was found to be payable under the terms of the Credit Agreement, and the set-off claimed by Bond Group for work performed on a separate garage project was allowed, but only after applying it first to interest and then to principal, following common law rules. The court rejected Bond Group’s argument that Morin Supply’s “unclean hands” in misallocating payments barred recovery of interest, as the doctrine of clean hands does not apply to claims for damages for breach of contract.

On the breach of trust claim, the court determined that Bond Group had breached its statutory trust obligations by failing to maintain a separate trust account, failing to provide an accounting of trust funds, and not paying Morin Supply in full for the projects. Both Maria and Tony Marcantonio were found personally liable for the breach of trust as directors who controlled and acquiesced in Bond Group’s conduct.

Ruling and overall outcome

The court granted summary judgment in favor of Morin Supply, holding Bond Group liable for breach of contract and all defendants liable for breach of trust. The court ordered that damages be calculated in accordance with its reasons, including the correct allocation of payments and application of interest, and directed the parties to provide the final damages figure. Full indemnity costs were awarded to Morin Supply, but the total was reduced to $30,000 due to Morin Supply’s improper reallocation of payments. The successful party was Morin Supply, but the exact amount awarded was to be finalized after further submissions from the parties, as the court required the parties to calculate damages based on the judgment’s findings. If the parties could not agree, a case conference would be scheduled to settle the amount.