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Direct Payments (2)

In our October 2024 newsletter, discussing the motion judge’s 2024 decision in Demikon Construction Ltd. v. Oakleigh Holdings Inc. (Ontario Superior Court of Justice), we said, “In some cases, however, we just cannot fathom the position that the lawyers for one of the parties take.” In doing so, we implied that the lawyers for the lien claimant were taking an unreasonable position that was bound to fail. The lien claimant appealed the decision we were discussing and, now, after reviewing the reasons of the Divisional Court, we can “fathom” the position that the lien claimant’s lawyers were taking.

Recap

The construction manager of a condominium project registered a $5 million claim for lien. The developer posted security for $5,050,000 to vacate the lien from title to the condo lands. The developer later moved under s. 44(5) of the Construction Act for an order reducing its posted security by the additional $3.5 million it had paid to the construction manager’s subs. Section 44(5) gives the court authority to reduce lien security “where it is appropriate to do so.”

The developer relied on s. 28 of the Act:

28. Where an owner, contractor or subcontractor makes a payment without obligation to do so to any person having a lien for or on account of any amount owing to that person for services or materials … and gives written notice of the payment … to the proper payer of that person, the payment shall be deemed to be a payment by the owner, contractor or subcontractor to the proper payer of that person …

The construction manager seemingly argued that s. 28 ought to be interpreted in a manner that required the subs to have a registered lien at the time of the payments and, it alleged, the subs did not. The judge disagreed, saying:

• The section gives two alternatives, the payee must have a lien or money owing to it for services or materials supplied. Here, the latter alternative applied.
• Even if it is necessary to have a lien, “having a lien” does not mean registering or perfecting a lien; it means only that the claimant has a right to register the lien. After all, the moment any person works on a project, the person doing the work has the right to register a lien and therefore “has a lien.”

The case had other issues, with which, we feel, the motion judge dealt adequately. However, if he did not adequately deal with the argument relating to s. 28, these other issues were irrelevant.

Interpretation

The Divisional Court brought into context two definitions in s. 1 of the Construction Act:

“lien claimant” means a person having a preserved or perfected lien.

“person having a lien” includes both a lien claimant and a person with an unpreserved lien.

Based on these definitions, the motion judge was correct in saying that s. 28 did not require that payment be made to a person who had registered a timely claim for lien. Instead, it referred to “any person having a lien“. This person would include both a lien claimant and a person with an unpreserved lien.

Accordingly, the real question is whether a sub, who had lien rights, but let them expire, is a “person with an unpreserved lien.”  Or does the definition include only a person who has lien rights, has not yet preserved them, but is still within time to do so? The motion judge did not address this question as we have posed it.

He interpreted “any person having a lien for or on account of any amount owing” to include any sub to whom money was owing for services or materials supplied to the improvement. The problem with this interpretation is that it did not account for all the key words in the section. The judge omitted the final words in this phrase: “to that person.”

Section 28 includes the following key words: “any person having a lien for or on account of any amount owing to that person“. When the section states that the money must be owed “to that person,” it refers to the person who has the lien. That person does not have to be a lien claimant (i.e. a person with a preserved or perfected lien); but the person must have lien rights.

Rationale

The Divisional Court decided that s. 28 did not allow payments to all subs; it only allowed payments to subs who either had a preserved lien or whose lien rights had not yet expired.

In coming to that interpretation, the court relied on an author who had written a textbook on the Construction Act and a 1982 report for recommended changes to the then Mechanics Lien Act, the precursor to the Construction Act.

The court gave the following rationale for limiting the rights under s. 28 to persons whose lien rights had not yet expired:

“Limiting the scope of the s. 28 payments to persons having a lien makes sense when considered in the context of the statutory scheme and the purpose of the legislation. While a person has a lien, they have an interest in the owner’s premises and in the holdbacks. The owners have an interest in seeing liens resolved because their lands can be tied up and because they have holdback obligations. This interest, however, disappears once the liens expire or are resolved. Once the liens expire, there is no practical reason under the Construction Act to allow payors to ‘jump the rung’ to avoid privity of contract, which is what s. 28 permits. This analysis is consistent with the conclusion that s. 28 ‘merely provides a method of preventing the registration of a lien or to facilitate the removal of a lien already registered’.”

Epilogue

The motion judge dealt with the s. 28 interpretation in two paragraphs; the Divisional Court took five paragraphs to overturn that interpretation. The construction manager had the same counsel on the motion and on appeal. Accordingly, one or more of three possibilities took place: the motion judge did not appreciate counsel’s interpretation argument; the motion judge disagreed with that argument, but did not set it down in full in his reasons for decision; or counsel’s argument was better on the appeal than on the motion.

The Divisional Court decided the appeal based on its recognition that the evidence the developer filed did not conclusively demonstrate that the developer paid subs who had unpreserved, but unexpired, claims for lien at the time of payment. The court left open the possibility that the developer could bring another motion to reduce the lien security based on better evidence.

The construction manager won the battle, but may still lose the war. This motion did not decide the action on its merits and we cannot see how the developer would not get credit for money it paid to the construction manager’s subs if the construction manager had owed that money to the subs.

 

Image courtesy of Obsahovka.

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