Case Review – Homes by DeSantis (Lake) Inc. v Sutton Forming Inc., 2023 ONSC 2628

 

Lessons Learned

  1. Preparation to dispute payment to a contractor should focus on ensuring that claims made by the owner agree with the owner’s documentary record regarding value received, including documents generated by their construction manager.
  2. Motions in lien litigation are of a deliberately summary nature, and a summary judgement of one or more matters in dispute may occur in the course of a motion even if not formally sought by either party.
  3. In a lien involving a stipulated-price contract, the owner/developer cannot prevent payment of subcontractors from the holdback funds.

Construction

Homes by DeSantis (Lake) Inc. is the owner and developer of the Grimsby condo project AquaZul Waterfront Condominiums, a mid-rise complex built on the Lake Ontario shore. In December 2017, DeSantis contracted concrete-forming services and materials from Halton Forming, which subcontracted the work to Sutton Forming, Inc.

In July 2019, DeSantis’ construction manager certified that the project was over 95% complete, triggering an obligation to make a payment to Halton by DeSantis. The developer refused to pay, alleging deficiencies, causing Halton to default on its payment to its subcontractor Sutton in the amount of approximately $1.1 million.

Litigation

Between October and November, Sutton registered and perfected its lien, and the registered lien claims of Sutton’s sub-sub-contractors were sheltered under Sutton’s perfected lien pursuant to the Construction Act.

In August 2020, Sutton notified DeSantis that the minimum undisputed holdback was sufficient to satisfy the claims of Sutton’s sub-sub-contractors, and funds were ultimately released for five of the six sub-sub-contractors, excepting Pilosio, an Italian scaffolding, formwork and shoring company.

DeSantis’s refusal to release funds to Pilosio led to a motion to confirm the correct amount of the holdback and to oblige DeSantis to pay Pilosio’s claim from it, which the motion judge ordered, as well as finding that the correct amount of the holdback was approximately $638,000.

Analysis

DeSantis appealed both the amount of the holdback and the order to pay Pilosio.

Holdback Types

In determining the questions on appeal, the Court cited the 2009 Superior Court decision Urbacon Building Groups Corp. v. Guelph (City), which held that the Construction Act creates two holdback obligations: the basic holdback of 10% of the contractual value of services and materials supplied, and the additional holdback of “any additional amount owed by the payor to the contractor on the contract which was performed.”

The distinction between the two types of holdback is critical, the court in Urbacon observed, because an owner is entitled to set off claims against a contractor in calculating the overall obligation, but set-off claims cannot be applied to reduce the owner’s obligation below the amount of the basic holdback.

Evidence of Value

The Court found that the motion judge had correctly cited and followed Urbacon, and approved of the motion judge’s use of the July 2019 completion certificate issued by DeSantis’s construction manager to assess the total value of the contract and derive from that the correct holdback figure.

Further, the Court noted that the motion judge was entitled to reject “bald assertions” by DeSantis respecting the holdback calculation and that the failure of DeSantis to amend the July 2019 payment certificate in the time and manner allotted by the contract to do so supported an inference that the payment certificate was a credible statement of the value of materials and services provided.

Summary Judgement

DeSantis next argued that the motion judge had in effect granted an unapplied-for summary judgement on a contested claim by DeSantis regarding deficiencies by Halton’s sub-subcontractors. The Court supported the motion judge, who had relied on s. 67 of the Construction Act (procedure should “as far as possible be of a summary character”) and Urbacon’s interpretation of s. 67: “the holdback provision, along with the rest of the Act, is designed to protect the subcontractors at the lower end of the pyramid from the hardship of litigation delay. There is no reason for subcontractors with clear entitlement to wait until the issues between the major parties are completely disposed of.”

Setting Off Against Subcontractors

The Court added that in this context – a stipulated-price contract – DeSantis had no actionable interest in the accounting between Halton and its subcontractor(s). Any dispensation to subcontractors was in fact a credit to DeSantis against whatever balance was ultimately deemed to be owing by DeSantis to Halton itself. A deficiency claim by DeSantis affects release of the holdback to Halton. Unless Halton also asserts a deficiency claim “down the ladder” against its own subcontractors, the DeSantis deficiency claim does not affect the eligibility of the subcontractors to receive holdback funds.

Case Review – 2708320 Ontario Ltd. cob Viceroy Homes v. Jia Development Inc., 2023 ONSC 2301

 

Construction

2425 Bayview Avenue in North York is situated in the middle of one of Toronto’s most desirable neighbourhoods. A previous developer of the site obtained approvals and permits for the construction of townhomes and underground parking before selling it to a second developer, Urbancorp Inc., which performed the demolition, excavation, and foundation work before becoming insolvent in 2016.

CB Bridle Path Inc. acquired the land, sold half-ownership to Jia Development Inc., and allowed the project to remain dormant until early 2022, when Bridle Path entered into a conditional sale agreement to offload its interest to a man named Biao Liu. Before the sale actually closed, Jia Development and Liu hired Viceroy Homes and authorized it to begin construction immediately.

Unfortunately, Liu ultimately chose not to conclude the sale. Viceroy Homes sought to partner with Jia Development in Liu’s stead, but was turned down, a decision that upset Viceroy’s principal. The same day, Viceroy sent Jia ten invoices totalling an astounding $3.7 million.

Jia duly rejected the invoices and the next day Viceroy filed a lien, claiming it had performed work consisting of “demolition of existing buildings, excavation, removal of debris, repair and completion of foundation, framing materials” over the course of a mere 39 days – including work that had in some cases, such as the demolition, already been performed in 2016 by somebody else.

Litigation

Litigation proceeded refreshingly briskly. Two months after filing the lien, Viceroy commenced an action, and two months after that its principal was cross-examined. On the first day he admitted that Viceroy had not actually performed all of the work described in the ten invoices supporting the lien, and on the second day he refused to answer any questions.

Bridle Path and Jia Development each filed a motion pursuant to section 47 of the Construction Act, which in its latest form permits a lien to be discharged if it’s frivolous, vexatious, and an abuse of process (as opposed to the old wording that such an accusation would previously have fallen under, “any other proper ground”).

Analysis

While the Court determined that the old version of the Construction Act applied, it found no material difference in application to the case at bar, but did take the opportunity to clarify the process to be followed in a section 47 motion. The moving party must prove that there is no triable issue as to the basis on which the lien is sought to be discharged, both parties must put their best foot forward in terms of evidence, with a particular onus on the lien claimant, and the court is entitled to presume that both parties have in fact presented their best evidence.

The Court also confirmed the standard definitions of the terms in question:

“Frivolous” is used to describe an action that is so highly unlikely to succeed that it is apparently devoid of practical merit.

“Vexatious” includes actions that obviously cannot succeed and that are brought for an improper purpose.

“Abuse of process” is a flexible doctrine that gives the court the inherent power to prevent the misuse of its process in a way that would be manifestly unfair to a party to the litigation before it, or would in some other way bring the administration of justice into disrepute.

In the circumstances, the Court had no trouble concluding that Viceroy’s lien claim had been made for the improper purpose of forcing an agreement to Viceroy’s joint venture proposal or functioning as an act of reprisal for not doing so, and vacated the lien on April 5, 2023.

Case Review – On Point Ltd. v. Conseil des Écoles Catholiques du Centre Est et al., 2023 ONSC 1341

 

Lessons Learned

1. Contrary to Inesco, a 1986 decision of the Ontario Superior Court, school portables can constitute a lienable improvement in the right circumstances – despite being “inherently impermanent” additions to land.

2. Given modern engineering proficiency, whether a good is permanently affixed to the land is a less-decisive consideration than it used to be – a surprising number of seemingly-permanent goods can now be removed from one location and installed elsewhere. As long as there is a substantial attachment, consideration of the value and utility of the good to the land takes considerably higher priority than it once did.

Construction

The Conseil des écoles catholiques du Centre-Est (“CECCE”) is Ontario’s largest French-language school board, teaching 21,000 students over an area covering more than 35,000 square kilometres, including the city of Ottawa.

In July 2019, CECCE hired Ty Corporation (“TyCorp”) to construct and install 14 school portables (small buildings located on school grounds, installed on a stilt foundation and capable of being relocated, used as classrooms when the capacity of the main school building overflows). Time was of the essence because the original contractor had failed to deliver and now the new school year was only two months away.

TyCorp only managed to complete 10 of the 14 portables. CECCE terminated TyCorp’s contract and partially withheld payment, TyCorp in turn failed to fully pay its subcontractors, and the liens flew.

Litigation

One of the liens was filed by OnPoint Ltd., which had been subcontracted to construct the portables on the grounds of École Paul-Desmarais. A new permanent wing was eventually to be added to the school to accommodate the increase in enrollment, at which time it was intended that the portables would be removed.

CECCE moved for summary judgement against OnPoint, arguing that portables – being merely temporary solutions to fluctuating student populations – are not improvements within the meaning of Ontario’s Construction Act and thus are not eligible to be liened.

OnPoint argued in turn that not only were the portables substantially attached to the land, but that installing portables, which are intended to extend the normal economic life of the land, constitutes capital repair and thus falls within the meaning of an improvement under section 1 of the Construction Act.

Analysis

Whether an object qualifies as an improvement is a delightfully complicated subject filled with counterintuitive conclusions, perhaps illustrated best by the Ontario Court of Appeal’s seminal 2007 decision Kennedy Electric, in which an assembly line constructed to manufacture Ford F-150 trucks was held not to constitute an improvement despite covering 100,000 square feet, weighing 500,000 tons and being connected to the building by nearly 3,000 bolts.

Since then the Act’s definition of an improvement had changed, and with much of the jurisprudence now of questionable applicability, the Court supplemented its analysis with external aids to clarify whether a portable was fish or fowl under the Act, including both textbooks and transcripts of the legislative hearings held during passage of the amendment of the Act.

The Court began its analysis with a nod to Kennedy Electric – which remains good law on the point that whether or not a person is entitled to a lien is to be strictly construed – but found that OnPoint had a right to lien the portables.

The Court focused in particular on the Act’s definition of an improvement as, inter alia, “essential to the normal or intended use of the land”, analogous to the Black’s Law Dictionary definition as “a valuable addition to a property…amounting to more than mere repairs or replacement, costing labor or capital and intended to enhance its value…or adapt it for new or further purposes.”

The portables certainly qualified, the Court observed, being essential to accommodate an increase of student population.

The Court also distinguished previous case law, particularly Inesco, that had seemingly disqualified portables and prefabricated structures from lien entitlement. “If a structure is manufactured with no particular end destination in mind,” the Court wrote, “it is considered a chattel that can be moved around at will. However, lien rights will exist where the structure is manufactured for specific land or in respect of a specific construction project.”

The Court then turned to the consideration of whether a supplied good is a permanent addition to the land on which it’s installed. This, the Court held, is an important factor but not decisive, especially in the context of modern engineering methods that enable a remarkable number of goods to be uninstalled and removed from a site.

Finally, the Court concluded that the heavy-duty nature of a portable’s construction weighed in favour of its status as an improvement, including the need for considerable preparation of the underlying earth, a concrete foundation that is not removed when the portable is relocated, the use of heavy-duty “hurricane anchors” to secure the portable to the foundation, and the wiring of the portable into the school’s electrical system.