
Legal Blog
Subterfuge
We continually preach that the party who is perceived to have not played by the rules gets the short end of the stick. The lien claimant in Triple “R” Demolition Inc. v. 1188648 Ontario Limited, a 1998 decision of the Ontario Court (General Division), is the latest example of this unwritten policy of the courts.
The Deal
An owner-developer needed a demolition contractor for its property. It entered into an agreement with Triple “R” Demolition Inc. (“TRDI”) to do the work. Mr. Sharma represented TRDI in the negotiations and signed the contract on behalf of TRDI. Sharma knew, and the owner did not know, that at the time of the contact execution, TRDI did not exist. Sharma was the operating mind of an unincorporated business in the name of his son. That business was registered as Triple “R” Demolition (“Triple”). Even though TRDI did not exist, Sharma used the name on its letterhead and allowed the agreement with the owner to refer to TRDI as an existing incorporated entity.
Ten months later, Triple had completed most, if not all, of the work, and the owner had paid it a significant amount of funds. The owner and Sharma had a dispute over extras. Sharma then incorporated TRDI and two months later registered a claim for lien.
The question for the court was whether the lien was valid.
Contract?
A claim for lien must enforce a contract. Was there a contract and, if so, with whom?
With TRDI?
TRDI did not exist at the date of the execution of the contract. Accordingly, under common law, there was no contract between it and the owner. However, section 21 of the Business Corporations Act allows for a subsequently incorporated corporation to adopt a contract made on its behalf within a reasonable time after its incorporation. For the adoption to be effective, the corporation must signify its intent to be bound by the contract. The cases have interpreted this to mean that the directors of the corporation must pass the appropriate resolutions and the corporation must by some action make it apparent to the contracting party that it is bound by the contract.
In the Triple case, no resolutions were passed and, aside from completing the work, TRDI never indicated that it had adopted the contract. Accordingly, TRDI had no contract with the owner.
With Sharma?
Even if there was no contract with TRDI, the common law will recognise a contract with its agent, Sharma, if the owner’s mistake as the corporate status of TRDI was not an essential term of the contract. If it was crucial for the owner to be dealing with an incorporated entity, the apparent contract is void where the belief was mistaken.
We would have thought that the incorporation or non-incorporation was rarely crucial. However, the judge held that the use of the letterhead showing TRDI as the entity, the reference in the contract to TRDI being incorporated and the fact that the 3 “R”s in its name were advertised to be “Reliable, Recyclers & Reasonable” were enough to show that the owner only intended to deal with an incorporated entity. Therefore, there was no contract with Sharma.
Form of the Lien
As far as we are concerned, once the judge held that there was no contact with TRDI, the claim for lien is void. However, the judge also referred to section 6 of the Construction Lien Act. That section allows a court to relieve against minor errors in the form of a claim for lien.
The judge concluded that the section was inapplicable. The affidavit of verification contained in the lien referred to a non-existent contract with TRDI and the error was not minor. In any case, the judge held that there was prejudice to the owner who had expected to be dealing with TRDI, not a non-existent corporation.
Result
The claim for lien was discharged. However, that did not end the matter. There was still an action commenced by a validly incorporated entity, TRDI. Although there was no contract between the owner and either Sharma or TRDI, TRDI still performed work for the owner. If the extras were valid, the owner should still have paid for them. The owner did not have to pay under contract but it did have to pay under “quantum meruit”. This is roughly translated as the amount that is merited for the work that is done. The question is no longer what was agreed on by the parties for payment but what is the work worth.
The judge allowed the action to continue on a quantum meruit basis.