Ontario Court Upholds Ruling Reducing Exaggerated Lien

The Ontario Superior Court of Justice (Divisional Court) recently released its decision in HMI Construction Inc. v. Index Energy Mills Road Corp., upholding a motion decision that reduces the security required to vacate liens registered under the Construction Lien Act (CLA). The decision illustrates the importance for contractors to correctly calculate their lien claims, the remedies available to an owner when a contractor fails to do so resulting in an exaggerated lien claim, and the willingness of courts to grant those remedies in appropriate cases.

BACKGROUND

The defendants had brought a motion requesting an order under section 47 of the CLA discharging two construction liens totalling over C$32-million registered by the plaintiff, or in the alternative, an order pursuant to section 44 of the CLA that the liens be vacated by posting security in an amount less than the amount claimed by the plaintiff. The motions judge held that the plaintiff had significantly exaggerated the lienable amount owing with respect to work done on the project. Declining to exercise his discretion to fully discharge the plaintiff’s liens, the motions judge granted the alternative relief sought by the defendants ordering that the liens could be vacated upon the posting of security of C$16-million, noting that even a C$16-million lien total was exaggerated.

At the heart of the dispute was the manner in which the plaintiff had calculated its liens. The motions judge found that the contract between the plaintiff and the defendant was a fixed-price contract. Based on the plaintiff’s own evidence, he held that when calculating its lien claim the plaintiff had used a “costs plus” approach, totalling its actual costs — including amounts claimed by subcontractors — and then adding a 10 per cent markup to that total amount. After deducting amounts it had received from the defendants, the balance owing pursuant to this approach was the amount claimed by the plaintiff in its liens. The motions judge held, among other things, that by using a “costs plus” approach, the plaintiff had ignored the whole point of a fixed-price contract and the payment certification process that was part of the contract, and that by adding a profit of 10 per cent to all work, it had ignored the fact that profit was already included in the price of work set out in the fixed-price contract.

The motions judge held that the plaintiff could have liened for disputed amounts owing pursuant to the original contract and for disputed work that was not included in the original contract, but that the plaintiff’s “costs plus” approach did not differentiate between the original contract work and extras.

DIVISIONAL COURT DECISION

The plaintiff appealed the motions judge’s decision to the Divisional Court. The appeal raised two questions: first, whether an order for reduced security was final and therefore appealable; and second, whether the motions judge had erred by reducing the security required to vacate the liens from title.

Under the CLA, no appeal lies from an interlocutory order made by the court, however, to this point there was no clear authority on whether an order reducing the amount of security required to vacate a lien was final or interlocutory. Bringing some much needed clarity to the law, the Divisional Court held that an order reducing the security required to discharge a lien from title pursuant to section 44(2) of the CLA is final and may be appealed to the Divisional Court.

On the substantive merits of the appeal, the Divisional Court agreed with the motions judge’s legal analysis and held that the motions judge had not made any palpable and overriding error of fact, or any error in the application of the law to the facts. The Divisional Court held that there was a “stipulated price contract” between the parties and that the price of contract work is measured by the stipulated price contract, not by the plaintiff’s costs.

The plaintiff argued before the Divisional Court that a quantum meruit claim is available for contract work even where there is an agreed contract price, relying on the court’s decision in Biotechnik Inc. v. O’Shanter Development Co. Ltd. (Biotechnik). The Divisional Court disagreed with the plaintiff’s interpretation of Biotechnik, holding that in that case the contract called for fixed payments for milestones under the contract and that the parties in that case did not dispute that the contract would govern work done to the milestones. Rather, the issue in Biotechnik was whether the lien claimant was entitled to be paid for work done after the last milestone that did not bring contract progress to the next milestone. The Divisional Court held that the case law and authorities do not stand for the proposition that where there is a construction lien, the lien claim shall be calculated on a “costs plus” basis, without regard to the contract.

The Divisional Court ultimately held that the motions judge’s conclusions were supported by the record and reflected no error in principle, and stated that the plaintiff was fortunate that the motions judge exercised his discretion not to discharge the liens entirely in the circumstances.

The decisions of the motions judge and the Divisional Court serve as a confirmation that a construction lien is an extraordinary pre-judgment security, which can be reduced or removed in the appropriate circumstances.

Blakes acted for the defendants on the motion and on the appeal before the Divisional Court.

For further information, please contact:

Seumas Woods                        416-863-3876
Iris Antonios                             416-863-3349

or any other member of our Construction Dispute Resolution group.

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