Legal Blog: Construction

Jun
06
2017

Trust Setoff (2)

Posted in Construction

In our September 2016 newsletter, we discussed Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., a 2016 decision of the Ontario Court of Appeal. In that case, the motions judge refused to allow a general to set off its claim against a sub relating to project #2 as a defence to the sub’s claim on project #1. He did so based on two rationales.

Rationale #1: when a sub claims against a general, relating to project #1, by way of an ordinary claim on contract, and not by way of a trust claim under the Construction Lien Act, then the general cannot claim setoff by way of section 12 of the Act on monies that the sub allegedly owes to the general on project #2.

Rationale #2: when a general does not segregate the monies due to the sub in a separate trust account and therefore breaches the Act’s trust provisions, the general cannot rely on section 12 of those trust provisions.

The Court of Appeal did not decide whether the motions judge was correct regarding rationale #1, but agreed that rationale #2 was fatal to the general’s claim for setoff. We now have another case dealing with rationale #1: 1587855 Ontario Inc. v. Contract Glaziers Corp., a 2016 decision of the Ontario Superior Court of Justice.

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Jun
06
2017

Advantage

Posted in Construction

A trust action has a number of advantages over a regular breach of contract action. An obvious advantage is the ability to claim against directors and officers of a corporate trustee. A more subtle advantage was brought to the fore in One-Way Drywall Inc. v. Lomax Management Inc., a 2016 decision of the Ontario Superior Court of Justice.

Action

A sub brought an action against a general for breach of contract and breach of trust and joined its two directors to the trust action. During the course of the action, the plaintiff amended its statement of claim to increase the amount claimed from $260,000 to $280,000.

The action moved along at a snail’s pace for over 4 years, mostly because of the defendants’ delay tactics. They finally attended at a discovery, but refused to answer any questions dealing with the project’s finances and the financial relationship between the owner and the general. In short, they stonewalled.

The general paid $260,000 to its lawyer in trust to the credit of the action to be payable if the sub succeeded on its contract claim. The two directors also offered to guarantee payment of any amount due to the sub to a maximum of $260,000.

The general and the two directors then brought a motion to have the trust portion of the action dismissed, resulting in the entire action being dismissed against the directors personally. They argued that, given the money paid to their lawyer and their offer of a guarantee, the trust aspect of the claim was pointless.

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May
05
2017

Limitations

Weinbaum v. Weidberg 2017 Ont Div Ct

Homeowners commenced an action in 2010 against contractor for a mould problem discovered in 2008 relating to a project completed in 1994. The contractor issued a third party action against the architect in 2011 claiming contribution and indemnity. The architectural agreement between the homeowners and the architect contained a provision that any cause of action that the homeowners had against the architect expired in 2000. Did this mean that the contractor could not claim indemnity against the architect? The contractor relied on section 18 of the Limitations Act which states that the two-year limitation period for contribution and indemnity runs from the date that the party claiming indemnification (i.e. the contractor) is served with the statement of claim. The court acknowledged that this section that dealt with limitations, but relied upon the 1978 Supreme Court of Canada decision in Dominion Chain v. Eastern Construction, which stated, regardless of limitation laws, contracting parties could limit their scope of liability in the contract so that when a right of a plaintiff (i.e. the homeowners) is lost by way of a contract, similarly the defendant (i.e. the contractor) has no right to claim over against the other contracting party (i.e. the architect).

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Apr
12
2017

Liens, Excessive

Petrelli Construction & Renovation Inc. v. Phillips 2016 Ont SCJ

Corporate lien claimant abandoned action. Judge awarded costs against corporation and against the corporation’s sole shareholder and director under section 86 of the Construction Lien Act. The director was held liable for an exaggerated or excessive lien because, even if he originally thought there were grounds for the validity of the lien, he should have realised that he lacked the capacity to prove it or bring the matter to trial. The lawyer for the lien claimant was held not to be liable for costs because the evidence did not indicate that he ought to have known that the lien was without foundation and, in any case, there was no evidence that he acted in bad faith, maliciously, or negligently. Nothing was ordered under section 35 because the owners did not provide evidence of damages.

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Apr
05
2017

Costs, Principles of Award

Brough and Whicher v. Lebeznick 2017 Ont SCJ

Construction matter in which the plaintiff contractor ultimately recovered $31,000, about 55% of what it had been claiming; part of the claim had not been proven and part had been reduced by virtue of the owners’ counterclaim, which had been allowed only in part and which, the judge ruled, had contained claims that were both remote and excessive. The normal award of costs would have been a payment from the defendant to the plaintiff reduced somewhat because of the conduct of the parties. The judge ignored the final result, determined that the plaintiff had not acted reasonably to deal with the owners’ complaints about workmanship and took a hard line at the outset of litigation. The plaintiff had claimed $22,000 in costs, the defendants had claimed $39,000 in costs, and the court awarded the defendant costs of $15,000. We suggest that this case was decided on principles that may not be in accordance with law and is an aberration.

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Mar
07
2017

Section 39 Request for Information

Valard Construction Ltd. v Bird Construction Co. 2016 Alta CA

Same situation as in Dolvin Mechanical v. Trisura 2014 Ont SCJ only the bond was taken out by the electrical subcontractor (the principal) in which the obligee was the general contractor. The bond surety denied coverage because the subsub applied for payment on the bond past the time limitations set out in the bond. The subsub sued the general contractor claiming that it should have notified the subsub of the bond’s existence. As in Dolvin, the majority held that an obligee had no duty to inform the bond beneficiaries of the bond’s existence. The minority held that the principal had a fiduciary duty to post the bond at the construction trailer so that subsubs would know about it.

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Mar
06
2017

One Rung

Posted in Construction

No. We are not talking about a bell. We are referring to rungs of a construction ladder. The Construction Lien Act trust provisions are set up to ensure that a beneficiary of a trust, one rung down the ladder, has a right of action against the trustee, with whom that beneficiary contracted, one rung up the ladder. That has not stopped subcontractors, two rungs down the ladder, from taking a run at an owner or subsubs from taking a run at a general. One such run was taken in Robert Nicholson Construction Co. v. Edgecon Construction Inc., a 2016 decision of the Ontario Divisional Court.

Unusual

An owner owed its general $1.3 million. For reasons of its own, the general directed the owner to pay those funds to a corporation associated with the general who had acted as a construction manager for the project. A sub, whom the general had failed to pay $141,000, was not pleased to learn of the “misdirected” revenue.

For purposes of the general’s trust liability to its unpaid subs, it mattered not that the general directed the owner to pay money to its associated corporation. The general would still be deemed to have received that money and would still be deemed to have held that money in trust for its subs. However, this did not satisfy the sub, who, after obtaining default judgment against the general, was unable to collect the judgment debt.

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Feb
23
2017

Mortgage-Lien Priority

Jade-Kennedy Development Corp (Re) 2016 Ont SCJ

Priority dispute between mortgagees of a bankrupt developer and lien claimants. The lien claimants had priority over the sale proceeds of land for the usual 10% of mortgage advances. The issue was whether they had priority in excess of that amount (i.e. was their initial priority under s.78(1) of the Construction Lien Act reversed if the mortgages fell within the provisions of s.78(6) of the CLA). S. 78(6) deals with a “subsequent mortgage,” which is a mortgage registered after the first lien arises (i.e. in essence, as soon as the 1st work is performed on the land). Under s.78(6), a subsequent mortgage has priority if the advance under it is made before registration or notice of a claim for lien. The court held that these are the only conditions a mortgage must meet for priority; there is no need for due diligence. Further, an advance includes deductions for all other amounts that the mortgagor is contractually liable to pay, such as legal fees and interest. However, a mortgage given to secure a prior debt is not an advance and does not qualify for priority.

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