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Sometimes court decisions are interesting, not so much for their facts or the application of law, but rather for their effect on decision-making and court processes. One such decision is found in RSG Mechanical v. 1398796 Ontario Inc., a 2015 decision of the Ontario Divisional Court.

 

Dispute

The facts were convoluted, but we will (over?) simplify them. A developer had a great idea: buy land and, on it, build townhouses and a high rise condominium. He granted four mortgages to finance the project. Unfortunately, after building and selling 49 of 61 townhouses, the developer ran out of money. Since the 12 remaining townhouses were in various stages of completion and sale, the 3^rd and 4^th mortgagees, in a complicated set of transactions over time, bought out the 1^st and 2^nd mortgages and ultimately the 4^th mortgage itself was paid.

The 3^rd mortgagee then posted $979,000 in security to vacate the lien claims on the project, allowing for the completion of the remaining townhouses and for the sale of the townhouses and the high rise condominium land.

The sale monies were sufficient to repay a significant portion the liabilities associated with the development, but were insufficient to pay all of the lien claimants, the monies due under the mortgages, and the cost to complete and sell the townhouses.

The lien claimants took the position that, since the mortgagee posted security to discharge their liens, the mortgagee was liable not only for the holdback money, but for all money posted to discharge the liens. There were other issues, but, due to space limitations, we will not deal with them.

 

Master

The construction lien Master decided that, in law, once a mortgagee posts security under section 44 of the Construction Lien Act, it loses the priority that it had before doing so and becomes liable for the full amount of the security posted.

At least two other prior decisions, one by the Divisional Court and one by a judge of the Superior Court of Justice (“SCJ”) had come to the opposite conclusion. The Master analysed those cases and decided that the judges in these cases had not undertaken or considered the analysis he performed. He therefore concluded that those cases were not binding on him.

 

Motions Judge

In Toronto, an SCJ judge may try a construction lien matter or, more usually, refer the matter to a construction lien Master for a report. A report is akin to reasons for decision given after a trial. However, before the report takes effect, the report must be confirmed by an SCJ judge – if a party objects to it. The confirmation process is the equivalent of an appeal. In essence, a party opposing confirmation must demonstrate that the Master erred, just as if the matter were being appealed from an SCJ judge to the Divisional Court or Court of Appeal. The Master’s decision will stand unless, on a matter of law, the Master is incorrect or, on a matter of fact or mixed fact and law, the Master made a palpable and overriding error.

The mortgagee in RSG opposed confirmation of the Master’s report. The judge hearing the motion had a number of criticisms of the Master’s decision and, unfortunately, the Master himself.

Merits

The judge followed the previous SCJ and Divisional Court decisions and held that a mortgagee does not lose priority to lien claimants for money in excess of the holdback amount merely because the mortgagee takes advantage of section 44 of the Act to vacate liens from title so that the lands can be sold.

We agree. The purpose of section 44 is to allow security to be posted to vacate liens so that money can flow down the construction pyramid. It does not matter who is paying the security: contractor, owner, or mortgagee. If the lien is not vacated, money does not flow. A person higher up in the pyramid ought not to lose priority to vacate liens; otherwise, no one would vacate liens and a construction project would grind to a halt

Binding

The motions judge was not impressed by the Master’s failure to follow prior court decisions of the SCJ. In his reasons for decision, he quoted Master Funduk, a colourful Master in Alberta, who in a 1989 decision stated:

Any legal system which has a judicial appeals process inherently creates a pecking order for the judiciary regarding where judicial decisions stand on the legal ladder.

I am bound by decisions of Queen’s Bench judges, by decisions of the Alberta Court of Appeal and by decisions of the Supreme Court of Canada. Very simply, Masters in Chambers of a superior trial court occupy the bottom rung of the superior courts judicial ladder.

I do not overrule decisions of a judge of this court. The judicial pecking order does not permit little peckers to overrule big peckers. It is the other way around.

 

This rule is called stare decisis (“let the decision stand”).

 

The motions judge went on to say:

That is, the Master found that he was not bound by the Divisional Court because he believed that he had done a more detailed analysis of the statute and the Divisional Court had not addressed his analysis. In so finding, he ignored the fundamental rule of stare decisis or binding precedent on which our legal system is built.

The Master was free to question the law in obiter dictum or non-binding commentary in his decision. He was not entitled to ignore the binding precedent of a senior Court. However fervently he believed his analysis to be correct, he could not apply it in the case before him in light of the current state of the law and in doing so he committed an error of law.

 

In failing to follow the binding precedents of a superior court, the Master committed an error of law.

 

Delay

The statement of claim was issued August 2004. The reference took place over 14 days in September and October 2008. The Master’s reasons were released April 5, 2013. The motions judge had this to say about the delay:

 

The Master reserved his decision after the trial for almost four-and-one-half years. The Master was actually retired prior to the release of his decision…There is simply no justification for a delay of four-and-one-half years to write a decision. …

 

The Master exposed all of the parties to financial loss, legal uncertainty and possibly to years of more litigation. He has also exposed his colleagues, the Court and the institution of civil justice to criticism. He has unfairly dealt a setback those who are working assiduously to make the civil justice system more timely, responsive, fair, and affordable.

 

Appeal

The lien claimants appealed the decision of the motions judge to the Ontario Divisional Court. It upheld the motions judge’s decision on all points. In particular, it confirmed his decision that the Master’s refusal to follow the prior SCJ jurisprudence was a breach of the principle of stare decisis and an error in principle allowing the motions judge to refuse to confirm the Master’s report.

We have heard reports that the lien claimants are seeking leave to appeal this decision to the Ontario Court of Appeal. On the issues of stare decisis and priority, holdback, and the vacating of liens, we feel that the appeal will be unsuccessful.

Image courtesy of Flikr, Creative Commons.

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