Legal Blog

Adjudication (2)

The adjudication cases keep on coming. We will discuss two more of them, both emanating out of the Ontario Superior Court of Justice. The first, Pasqualino v. MGM-Homes Design Inc., dealt with a situation in which a contractor obtained an adjudication order, after the contractor had registered a claim for lien and seemingly after the contract was completed. The second, Okkin Construction Inc. v. Apostolopoulos, dealt with a situation in which an adjudication order was made in favour of a general contractor after its subcontractor registered its own claim for lien.

Pasqualino

A contractor registered a $169,000 claim for lien. The owner vacated the claim for lien by paying $211,000 into court. Then the contractor filed a notice of adjudication. Approximately one month later, an adjudicator decided that the owner had to pay $120,000 to the contractor. At the adjudication, neither party raised an issue as to the adjudicator’s jurisdiction to make his award. The owner brought a motion pursuant to s. 13.18 of the Construction Act for leave to bring an application for judicial review to set aside the adjudicator’s award.

An adjudicator’s award can be set aside in very limited circumstances. One of those circumstances is set out in s. 13.18(5)(2) as follows:” The contract or subcontract is invalid or has ceased to exist.” The owner took the position that, in this case, the contractor had no right to commence the adjudication because the contract had ceased to exist. Why had it ceased to exist? Because, he alleged, the contract had been abandoned or terminated before the notice to adjudicate was delivered. The owner also argued that the adjudication order was improper because the contractor’s claim for lien was previously registered and bonded off with security.

Termination

The judge first noted that whether the contract had been abandoned or terminated did not cause the contract to cease to exist. A contract ceasing to exist is different from a contract having been terminated. Most contracts that are terminated still exist; although  the performance is brought to an end, the rights and obligations under them as of the termination date still exist. The only time a contract would cease to exist is if a court determined that the contract ought to be rescinded (i.e. declared invalid from the start).

The judge then noted that s. 13.5 (5) of the Act expressly provides that construction disputes could be referred to adjudication regardless whether there was a court action dealing with the same subject matter. The judge stated that if the owner paid the contractor the amount that the adjudicator awarded, he would have a right to seek a reduction of the security that he posted to vacate the claim for lien. Ultimately, he would not be paying twice. Indeed, we could see the owner asking the court in the lien action for an order to allow part of the money that  he paid into court to be paid out of court to satisfy the adjudication order. If that were done, the owner would not be paying twice and then recouping the money, it would come straight from the money paid into court.

Different Concepts

The judge held that the adjudicator ought not to be required to delve into factual and legal determinations on whether a contract was abandoned or terminated because the simplified and expeditious process of adjudication would be defeated if the adjudicator were required to do so. We disagree. Our disagreement arises because the Act has two different concepts. Section 13.5(3) states that an adjudication “may not be commenced if the notice of adjudication is given after the date the contract or subcontract is completed” unless the parties agree otherwise. This concept differs from the concept of judicial review under s 13.18(5)(2) that requires that a contract cease to exist.  In essence, if the parties do not agree, the adjudicator must decide whether a contract is completed, but the adjudicator’s decision is not subject to review unless the contract ceased to exist.

Accordingly, once the owner agreed to the adjudicator’s jurisdiction, the owner therefore consented to the adjudication and could not raise, at the review level, the concept of a contract being completed.

Okkin

The owner, who had been paying all of the general’s invoices without holdback, terminated the contract when it went over budget and took the position that he had overpaid for the work already performed. The general filed a notice of adjudication, but before the adjudication was heard, its sub registered a construction lien for $196,000. Within a couple of weeks, the general also registered a construction lien for $403,000. One month later, the adjudicator ordered that the owner pay the general $208,000.

The owner was concerned that he could end up paying $208,000 and then, if the general did not pay the sub, be liable for holdbacks that were not held back and have to pay $208,000 a second time.

The owner brought a motion for directions rather than seeking leave to review the adjudicator’s order. The judge held that what the owner was really trying to do was seek a stay of the adjudicator’s order, a remedy for which, the judge held, the judge had no jurisdiction to grant. For that reason alone, the judge dismissed the motion.

Review

The judge went on to discuss what would have happened had the owner applied for leave for judicial review of the adjudicator’s order. She noted that there was a disagreement as to whether the owner raised the holdback issues before the adjudicator. Obviously, if the owner did not, the owner would have no right to complain. However, the judge noted that, for her purposes, it was irrelevant whether the owner raised the issue before the adjudicator. It was simply not an issue that could be dealt with by way of the limited jurisdiction to review a decision.

In our opinion, if the holdback provisions were indeed raised before the adjudicator, then the adjudicator’s decision was dead wrong. An adjudication award cannot put the payor in jeopardy for a double payment, particularly because s. 13.19(1) of the Act stipulates that a requirement to pay an amount is subject to any requirement for the payor to retain a holdback in accordance with the Act. The adjudicator could have and should have directed the owner to pay the award into court to the credit of the sub’s lien action.

Double Jeopardy

The possibility that the owner might be paying the same $208,000 twice did not seem to disturb the judge. She noted that s. 8 of the Act created a trust fund and that, on receipt, the general had to hold the money in trust for the sub; accordingly, the sub would not be in a position in which it would need to claim that money from the owner for breach of the holdback provisions. Unfortunately, not all trustees of a trust fund honour their trust fund obligations. Construction jurisprudence is replete with cases in which trustees did not honour their obligations.

Although the judge said that she had no jurisdiction to deal with this matter, we find that troubling. The Act again sets out two concepts: the first concept is that an adjudicator’s award may be enforced like any other order of the court. The second concept, under s. 13(19)(1), is that a requirement to pay pursuant to the order is subject to a requirement to retain a holdback in accordance with the Act. Why could the judge not have dealt with these two concepts so that they worked in concert with each other?

 

Image courtesy of Skitterphoto.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.