September 8, 2014

The recent Ontario Superior Court case of Moody v Hirsh explores the issue of when a plaintiff is able to trace the money he or she paid to a defendant into the defendant’s own property. The decision demonstrates that the circumstances in which a court will make an order imposing a constructive trust over the defendant’s property before the resolution of the claim are limited.

The trustees of the Moody Family Trust hired Hirsh Construction to build a large log cabin in Muskoka. The cabin was not completed to the trustees’ satisfaction, and they commenced a suit against the construction company for breach of contract and negligence. While the first action was still pending, the trustees commenced a second action against the construction company for a declaration that the defendants committed fraud. As part of the second proceeding, the trustees brought an interim motion seeking the imposition of a constructive trust over two properties owned by the defendants, alleging that the money they paid the construction company to build their cottage was actually use to build and renovate the defendant’s own buildings. The plaintiffs also sought an accounting from the construction company showing how their money had been spent by the defendants.

The court refused to grant the plaintiffs’ interim motion. The court held that, in general, companies selling a product or service cannot be held to “account” for the money they receive from clients; how companies spend the money they receive is not their client’s concern. Once money has been given to a company, the money ceases to be the “client’s” money and cannot be traced to the company’s other assets. Clients cannot seek to have “their” money returned. Rather, clients can seek damages against the company to compensate them for their loss or ask for specific performance of the contract.

The court reminded the parties of the general rule that a defendant cannot be compelled to offer a security for a debt that has yet to be proven. Only in limited cases will a court interfere with the free management of a defendant’s property before a judgment is rendered. The main exception to this general rule is where the property itself is the subject of the litigation. In those cases, the court may order an injunction prohibiting a defendant from disposing of the property or otherwise encumbering it.

In this case, the plaintiffs did not assert an ownership right in the defendant’s property beyond their “tracing” argument. The court held that tracing was inappropriate in these circumstances and denied the plaintiffs their requested relief.

This case is a good reminder that tracing funds and asking for a party to account are not remedies available in all circumstances. Usually, these remedies are available where a fiduciary relationship exists between parties, for example in estates or guardianship cases. Absent special circumstances, it will be difficult to trace lost funds into other property.