Improving Security of Payment Building and Construction Industry

4. Trusts Page 47National Public Works Council IncImproving Security of Payment in the Building and Construction Industry4.8.7 If the obligation to hold monies in trust, whether deemed or otherwise, is only forone level in the contractual chain, that between the Head Contractor andSubcontractors, does the Principal or client/owner have any fiduciary obligationstowards a Subcontractor if the Head Contractor defaults?It is unlikely that the law, as it currently applies, would deem a Principal to havefiduciary obligations towards Subcontractors of the Head Contractor where there is noprivity of contract between them. However, a contract might create a deemed trustand the Principal may be held to be a fiduciary of the Subcontractor. Clear terms inthe contract would be required to the effect that monies held by a Head Contractorwere held on trust for a specific Subcontractor or Subcontractors, otherwise afiduciary obligation would not be imposed upon a Principal.4.8.8 What methods of recovery are there for trust beneficiaries on monies paid out bythe trustee (Contractor) improperly to another party following the HeadContractor's insolvency?Beneficiaries are not creditors of the Bankruptcy or Liquidation per se. Their right toclaim against the property lies where there is insufficient trust property to settle theiraccount. Failing the availability of trust property, the claimant will inevitably have acreditor's claim against the Bankruptcy or Liquidation arising from a breach of trustor breach of contract.If the Contractor misappropriates monies knowing that they were trust monies, it maybe that a criminal prosecution could be instituted against the Contractor for fraud ortheft. The criminal law may then impose a requirement as a term of penalty forpayment to be made to the Subcontractor by way of restitution.A Subcontractor may be able to recover monies paid out improperly to another partyby way of the doctrine of constructive trust. A constructive trust can attach to specificproperty which is not the subject of any express trust, but is held by a person in suchcircumstances where it would be inequitable to allow him to assert full beneficialownership of that property. Under those circumstances, that person would hold theproperty as constructive trustee for the Subcontractor. A constructive trust will bespecifically formed where monies are appropriated by way of fraud.Further, if the Trustee in Bankruptcy or Liquidator was aware of the existence of theexempt property, but failed to retain it for the claimant, then the claimant may have aclaim against the Trustee in Bankruptcy or Liquidator personally.If a Head Contractor improperly pays monies earmarked for a Subcontractor to athird-party, the Subcontractor is able to recover those monies pursuant to the doctrineof tracing. This is the equitable right of beneficiaries under a trust to follow assets towhich they are entitled, or other assets into which they have been converted, into thehands of those who hold them. At first instance, a Subcontractor would have toattempt to recover monies directly from the Head Contractor. A failure to recoverthose monies from the Head Contractor would enable the Subcontractor to apply theequitable doctrine of tracing to the third-party in order to recover those funds. Of