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Direct Payments

In almost all legal cases, we can understand the positions of the parties. Some positions are better; some are worse. But at least they are reasonably arguable. In some cases, however, we just cannot fathom the position that the lawyers for one of the parties take. The case of Demikon Construction Ltd. v. Oakleigh Holdings Inc., a 2024 decision of the Ontario Superior Court of Justice, is one of those cases.

Motion

The construction manager of a condominium project registered a $5 million claim for lien. The developer posted security for $5,050,000 (i.e. the lien amount plus $50,000 for costs). The developer obviously needed to clear title so that mortgage money or unit sales would flow in the normal course.

The construction manager registered its lien in accordance with an accounting generated six weeks earlier than the lien registration date. The accounting gave the developer credit for approximately $700,000 that the developer had paid to the construction manager’s subcontractors before the accounting. However, between the date of the accounting and the lien registration date, the developer paid an additional $3.5 million to the construction manager’s project subs. The construction manager did not give credit for this money.

The developer 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 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 developer argued that (i) it made payments to subs who had supplied materials or services to the project, (ii) the construction manager owed that money to the subs, and (iii) it notified the construction manager of the payments it had made. Accordingly, its payments to the subs were deemed to be payments to the construction manager.

Subs – No Lien

The construction manager 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 the subs did not. The judge disagreed:

• The section gives two alternatives, the payee must have a lien or money owing to it for services or materials supplied. 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 work is done on a project, the person doing the work has the right to register a lien and therefore “has a lien.”

It seems that the construction manager also argued that s. 28 ought to be interpreted as requiring it, as payor to the subs, either to agree to, or have input into, the developer’s direct payments to the subs. The judge again disagreed, stating that nothing in s. 28 requires this and “I am not prepared to graft such a condition onto a s. 28 payment.”

Accounting

The construction manager argued that the developer’s accounting evidence was unreliable because qualified accountants did not swear the affidavits in support, the information that was provided was “convoluted,” and the construction manager could not follow the logic or process of the analysis. These arguments had problems:

• Accounting evidence does not necessitate accountants. The judge found the evidence to be “highly professional, comprehensive, accurate, and instructive.”
• The developer’s accounting was indeed difficult to understand – because of the sheer quantity of the number of invoices and payments involved. The judge described the developer’s evidence as follows:

“The details are painstakingly set out in their materials. There is no reason to doubt the accuracy and reliability of that evidence. Contrary to plaintiff counsel’s assertion, the information is not at all convoluted. It is necessarily dense and extensive given that it is incorporates dozens of subcontractors, hundreds of invoices, countless back up documents spanning more than a year and involves millions of dollars of payments. The accounting includes cross-references to invoices, bank statements, highlighting of individual transactions and a dissection of batch transactions, cancelled cheques, reconciliation of HST, accounting for holdback, etc. It is entirely transparent.”

Remarkably, the construction manager adduced no evidence to demonstrate that it paid the subs and did not challenge the developer’s calculation or the methodology in any meaningful way. The construction manager failed to establish a reasonable basis for its full lien claim and failed to put its best foot forward on the motion.

Common Sense

Aside from the legalistic interpretations, the judge looked at the issue pragmatically and applied common sense. A précis of some of his statements follows:

• Why would the construction manager give credit for money paid to subs before its accounting and not for the payments the developer made to subs after its accounting and before the registration of the lien?
• How can the construction manager claim that the developer’s accounting is incorrect when the construction manager knows exactly what it owes (or not) to the subs and does not share that information?
• It is in keeping with both the purpose and the logic of the Act that lien security should be reduced if a project owner has made direct subcontractor payments, whatever the reason. Absent fraud, the motivation behind the payments does not matter.
• It would be an unreasonable outcome if security posted to vacate a lien could not be reduced for part payment of a component that was included in the contract price.
• The construction manager’s debt owing to the subs was reduced or extinguished. It would be entirely unfair to have an owner avail itself of the s. 28 direct payment provisions only to be denied the relief under s. 44(5).

Upshot

The judge ordered that the posted security be reduced by $3.5 million.

The judge had ruled on two motions: this motion and a motion that the construction manager had brought relating to undertakings given in a cross-examination. The developer was successful on both and the judge awarded costs for both.

On the undertakings motion, the judge awarded partial indemnity costs of $15,000 plus HST. He noted that the motion itself was not unreasonable or oppressive and that there was no reason to award costs on a higher scale.

On the security motion, however, the judge held that the construction manager should have conceded that the developer made the direct subcontractor payments and agreed to a security reduction. The judge awarded costs of $110,000 plus HST and an additional $44,500 plus HST for disbursements paid to the developer’s consultant who produced the accounting.

In the aggregate, the judge awarded $214,160 of the $279,613 that the developer had claimed. Approximately $47,000 of that $64,000 shortfall represented disbursements that the judge thought were too high for what had to be proved.

This was all a monumental waste of money for an issue that ought to have been obvious from the start.

 

Image courtesy of succo.

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