Legal Blog

Hard Times

The Construction Act specifies times by which a lien claimant must perform certain acts or lose the benefit of the Act. By way of an example, a lien claimant must preserve a claim for lien within 60 days of the date that the lien period starts to run or kiss the lien goodbye. Invariably, as is the case with any time limitation, for one reason or another people do not comply with a limitation deadline. Some then attempt to remedy the situation and keep the lien alive. They are almost invariably unsuccessful and sometimes make a bad situation even worse. One example is set out in Pryers Construction Ltd. v. MVMB Holdings Inc., a 2019 decision of the Ontario Divisional Court.

Players

A contractor had an oral contract to perform renovation work for a tenant. Initially, the tenant paid for that work, through its mortgagee, but ultimately a number of invoices went unpaid. The contractor registered its claim for lien against freehold property, not against the tenant’s leasehold interest in that property. The owner corporation and the tenant corporation were associated with each other, owned by the same individual. The claim for lien stated that the services had been rendered to the owner of the freehold property although the contractor did not even know of  the actual owner until it searched title to the property for the purpose of registering the claim for lien.

The contractor subsequently commenced an action to perfect the lien and named, as defendants, the owner of the property and the individual who was the principal of both the owner and the tenant.

The contractor’s statement of claim had two components: (i) a claim to enforce the lien and (ii) a claim for judgment based on breach of contract. The breach of contract claim, if successful, would have given the contractor a judgment against the defendants, but, unlike the action to enforce the lien, would not have been secured against the land.

The owner, in its statement of defence, pleaded that the construction contract had been with the tenant and that only the tenant should have been named as a defendant. For whatever reason, the contractor chose not to immediately advance a claim in contract against the tenant.

Only at the commencement of trial did the contractor move for an order amending the statement of claim to add the tenant as a defendant. The trial judge allowed the contractor to do so, but also allowed the tenant to plead the Limitations Act, 2002 as a defence.

Trial Decision

The trial judge ultimately found both the owner corporation and the tenant corporations to be “owners” within the meaning of section 1 of the Construction Act and granted judgment to the contractor enforcing its claim for lien against the owner’s interest in the property. For whatever reason, the trial judge failed to distinguish between the tenant’s leasehold interest and the owner’s freehold interest in the property.

In granting judgment against the tenant, the judge held that the time allowed to the contractor to commence its action and perfect its lien could be extended under the “doctrine of special circumstances.”

The tenant and owner appealed.

Special Circumstances

Under the old Limitations Act, the doctrine of special circumstances allowed a court the discretion to add new parties and new causes of action following the expiry of a limitation period if the plaintiff could show special circumstances as to why it allowed the limitation period to expire. The new Limitations Act, 2002 abolished that doctrine for limitation periods set out in that Act, but not for other limitation periods that might have been prescribed by a statute other than that Act.

The contractor had argued that the “special circumstances” doctrine was available to a plaintiff in a construction lien action and that the trial judge used his discretion appropriately to add the tenant as a party defendant.

Action Against Tenant

We reiterate: the contractor’s statement of claim had a claim to enforce the lien and a claim for judgment based on breach of contract, but, for each claim against the tenant, the contractor needed a time extension. The lien action was out of time because of the contractor’s failure to commence an action against the tenant within 90 days and, we suggest, for failure to register the lien against the tenant’s leasehold interest. The contract action, which was subject to a 2-year limitation period, was out of time because that limitation period had expired 8 months before the motion to add the tenant as a party defendant.

The Divisional Court noted that the doctrine of special circumstances had never been held to apply to an action to enforce a construction lien. Previous jurisprudence had stated that “the time limits set out in the CLA are prescribed by statute and leave no room for judicial discretion.” The dates set out in the Construction Act are hard dates and are not subject to any discretion to extend them.

The contractor was also unable to rely upon the doctrine of special circumstances for  its claim against the tenant on contract because the new Limitations Act, 2002 had abolished the doctrine.

Action Against Owner

Section 1(1) of the Act defines an owner as a person upon whose credit, on whose behalf, with whose consent, or for whose direct benefit an improvement is made. The trial judge held that the owner was an “owner” for purposes of the contractor’s work. He did so because the same individual controlled both the owner and the tenant and, therefore, created a situation in which, on behalf of the owner, the individual requested the improvements and consented to the improvements being made.

The Divisional Court analysed the situation as follows:

“(Individual) was the sole officer, director and shareholder of both corporations. The question of law is whether it follows, from the mere fact of common governance and ownership, that in requesting the improvement upon behalf of (tenant), and upon the credit of, or with the privity or consent of, (tenant), (individual) was also requesting the improvement upon behalf of (owner), and upon the credit of, or with the privity or consent of, (owner).”

The Divisional Court stated that the trial judge, in rendering the owner liable, pierced the owner’s corporate veil. Despite the tenant and owner being two distinct legal entities, the judge held that the tenant’s acts were acts of the owner merely because the individual was the sole officer, director, and shareholder of both. In this, the trial judge erred at law. You need more than joint ownership to lift the corporate veil; you need the corporation being used as a shield for fraudulent or improper conduct. But the trial judge specifically stated, when dismissing the contractor’s action against the individual, that there was no significant evidence of bad faith and certainly no evidence of fraudulent activity on the individual’s part for either corporation.

Upshot

The contractor registered a lien against the wrong interest in land and commenced an action against the wrong owner of the leasehold interest. It also had no grounds to commence its action against the freehold owner. These errors had nothing to do with unproven improper conduct on behalf of the individual or the two corporations.

The Divisional Court allowed the appeal and dismissed the contractor’s action entirely.

The contractor received nothing for its efforts. Its invoices remained unpaid and it had to pay for its lawyer through to trial and on appeal. To add insult to injury, the court ordered the contractor to pay the defendants $13,000 for costs of the appeal and $35,000 for costs of the action. Construction liens are a minefield for the unwary.

 

Image courtesy of mrbobdobolina.

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