Legal Blog

Adjudication Effects

Adjudication is the means by which the prompt payment provisions of the Construction Act (“Act“) are enforced. An adjudication decision will order, on an interim basis, that a party either pay or not pay money to another. It is interim because an adjudication order can be overturned in an arbitration or court proceedings. Does an adjudication decision have any other effect on the parties? This question was answered in Arad Incorporated v. Rejali, a 2023 decision of the Ontario Superior Court of Justice.

Convoluted

This case demonstrates the usual problems with a residential project. No one really knew who was contracting with whom. We have a corporate plaintiff (call it the subcontractor) and the subcontractor’s principal. We have a general contractor. And we have two owners.

The sub registered a claim for lien and commenced an action to perfect the lien. In the action, the sub claimed that the general either acted as agent for, or was a joint venture partner of, the owners. Accordingly, the sub claimed that it had a contract with the owners and the general. Normally, the contractual positions are fairly straightforward. The owners have a contract with the general; the general has a contract with the sub; and the sub has no contract with the owner. Why was the sub alleging agency or a joint venture? Because the agreement between the general and the sub was not in writing, other than some handwritten instructions, and did not set out who was contracting with whom. Rinky-dink contracts cause problems; they are also a harbinger of future problem in the construction of the project.

The owners vacated the claim for lien and certificate of action by posting security in the form of money paid into court.

Adjudications

In addition to the action, the parties commenced two adjudications. The sub commenced one of them, seeking money that the sub said was owed to it for the work it performed. The general commenced a second adjudication for money that it had allegedly overpaid, not by way of payment to the sub, but to the sub’s principal. Why the general would be paying the sub’s principal is beyond our comprehension.

The adjudications were completed based on documentary evidence, oral submissions, and a site visit.

In the first adjudication, the adjudicator found:

• The general was indeed the general contractor.
• Major changes were made as construction progressed.
• A handwritten contract included all changes and additional work.
• The sub provided no proper monthly invoices.
• The sub had the obligation to deliver labour and materials.
• The sub completed the work it had contracted to complete for a value of $318,000.
• The sub had no legally binding contract in place with the general; accordingly, based on the principles of quantum meruit (i.e. you receive the value of the work performed, regardless whether you have a contract), the adjudicator held that the sub was entitled to receive $280,000.
• Because the general had already paid more than $280,000 to the sub, it owed no money to the sub.

We are not sure whether the adjudicator set out the findings of facts incomprehensibly or whether the judge’s summary of the findings set out facts that were mutually exclusive. How can work be contracted for a specific amount and there be no contract?

In the second adjudication, the adjudicator found:

• There was no agreement between the general and the principal; rather, the general retained the sub to perform the work.
• The principal received no funds and was therefore not responsible for any overpayment that the general claimed.

Effect

The owners had paid money into court to vacate the sub’s claim for lien. Given that the adjudicator had decided that the sub was owed nothing, the owners and the general brought a motion to have that money returned to the owners.

The judge noted that the adjudicator’s decisions were interim decisions. The purpose of an interim decision is to allow the parties to continue litigating the issues, subject to the disputes being finally determined by way of the courts or by way of arbitration. Interim decisions do not end the proceedings and an adjudicator’s decision, while instructive, is not binding on a court or an arbitrator.

Consequently, the judge had to determine, based on all evidence, whether, under section 44(5) of the Act, it was appropriate to make an order to deliver up or reduce the posted security. In making this determination, the judge held that the motion material had to satisfy him that there was no reasonable prospect of the sub proving a lien amount that would attract the requirement for security.

The judge held that the adjudicator’s award did not meet the evidentiary threshold required for the judge to come to that conclusion because:

• the adjudicator made his finding based on his opinion as an engineer without hearing expert evidence;
• none of the parties had an opportunity to contest that opinion;
• the findings were not all based on admissible evidence;
• the adjudicator acknowledged that there were contradictory claims and contested facts, including those relating to the agreements, the scope of work to be performed, and the work actually performed;
• he conceded that he did not consider the sub’s claims for extras because he did not have “proper evidence;” and
• he decided to rely on the documentation provided and then use his own construction and engineering experience to make his final determinations.

As far as we can see, the adjudicator was given insufficient evidence, had to make a decision, and made it. But that did not mean that this interim decision would have the effect of eliminating security.

Decision

The judge held that to permit the sub’s security to be reduced to nothing at this very early stage in the litigation, based solely on the adjudicator’s determinations, would “not only be contrary to the purpose of the Act but also would provide owners and contractors with an easier means to invalidate the security to lien claimants that the Act provides.” This, in the judge’s opinion, was not the purpose of the adjudicative proceedings; rather, that process was an interim measure to keep money flowing down the construction pyramid so that people supplying labour and materials would be paid on a timely basis.

The judge therefore dismissed the defendants’ motion and left the security as it was.

Moral

This decision has two takeaways:

• Adjudication under the Act serves as an interim mechanism to facilitate the flow of funds, not as a conclusive resolution of disputes.
• An interim adjudication determination may not and probably will not meet the evidentiary threshold required for altering the status of security posted under the Act. Motions, like any other court dispute, are won or lost on evidence and the better the evidence, the better the result.

 

Image courtesy of Raten-Kauf.

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