Aiken Bros. Hardware Ltd. v. Sargeant et al.

Greg Brady Construction Ltd. v. Sargeant et al. [Indexed as: Aiken Bros. Hardware Ltd. v. Sargeant]

79 O.R. (3d) 275

[2006] O.J. No. 706

Docket: C43365

Court of Appeal for Ontario,

Laskin, Goudge and Feldman JJ.A.

February 24, 2006

Construction law -- Overpayment by owner -- Section 24(1) of Construction Lien Act permitting owner to make payments "without jeopardy" on contract up to 90 per cent of price of services or materials supplied -- Owner who makes payments of over 90 percent not liable to lien claimants for amount of overpayment in addition to its liability for 10 per cent statutory holdback -- Construction Lien Act, R.S.O. 1990, c. C.30, s. 24(1).

Under s. 24(1) of the Construction Lien Act an owner may "without jeopardy" make payments on a contract up to 90 per cent of the price of the services or materials that have been supplied under that contract. In their last payment to the general contractor (at which time the lien claimants had not yet given notice of a lien), the owners paid the general contractor more than 90 per cent of the price of the services and materials that had been supplied. The contractor did not pay the subcontractors. The lien claimants claimed the owners' overpayment in addition to the 10 per cent statutory holdback. The trial judge rejected their claim, holding that the extent of the owners' liability was the statutory holdback. The majority in the Divisional Court found that the lien claimants were entitled to the overpayment. The owners appealed.

Held, the appeal should be allowed. [page276]

The conclusion of the majority in the Divisional Court is contrary to the statutory scheme and in particular, contrary to s. 23(2) of the Construction Lien Act. Where an owner overpays contrary to s. 24(1) it puts itself in jeopardy. Here, the owners overpaid the contractor and the contractor did not pay the subcontractors. Thus, the owners exposed themselves to a further payment to the subcontractors to meet their statutory obligation. However, they later satisfied their statutory obligation by the payment of their required holdback. The owners had no privity of contract with either lien claimant. Their obligation to those subcontractors was solely an obligation created by the Construction Lien Act. Under that statute, the owners' obligation was limited to their basic holdback. This limitation is found in s. 23(2) of the Act, which provides that where the defaulting payer is the contractor, the owner's personal liability to a lien claimant or to a class of lien claimants as defined by s. 79 does not exceed the holdbacks the owner is required to retain. Section 24(1) does not give subcontractors a cause of action against the owner to recover an amount in excess of the owner's statutory holdback.

APPEAL by the owners from the judgment of the majority of the Divisional Court allowing an appeal from the judgment limiting the owners' liability to lien claimants to statutory holdback.

Cases referred to James Dick Construction Ltd. v. Durham Board of Education (2000), 2000 26990 (ON SCDC), 50 O.R. (3d) 308, [2000] O.J. No. 706, 190 D.L.R. (4th) 755 (Div. Ct.) Statutes referred to Construction Lien Act, R.S.O. 1990, c. C.30, ss. 22(1), 23(2), 24(1)

R.H. Thomson, for respondents Aiken Bros. and Greg Brady. Michael Woods, for appellants Jean and John Sargeant.

The judgment of the court was delivered by

LASKIN J.A.:--

A. Introduction

[1] Under s. 24(1) of the Construction Lien Act, R.S.O. 1990, c. C.30 an owner may "without jeopardy" make payments on a contract up to 90 per cent of the price of the services or materials that have been supplied under that contract. Where an owner makes payments of over 90 per cent of the price of services or materials supplied, is the owner liable to lien claimants for the amount of the overpayment, in addition to its liability for the statutory holdback of 10 per cent? That is the sole question that arises on this appeal.

[2] It is an important question, though the amounts at stake are small. It is also a difficult question. The four judges who have heard this case have divided in their views. The majority of the Divisional Court answered the question "yes", thus finding in favour of the respondent lien claimants. The dissenting judge in [page277] the Divisional Court and the trial judge answered the question "no", thus finding in favour of the appellant owners. I, too, would find in favour of the appellants and therefore would allow the appeal.

B. Discussion

[3] The appellants Jean and John Sargeant owned a vacant piece of property in the town of Saugeen Shores in the county of Bruce. In May 2001, the Sargeants entered into a construction contract with Timothy Fiegehen (operating as TAF Contracting) to build a house on their property. Fiegehen hired the respondent Aiken Bros. Hardware Limited to do the heating, plumbing and electrical work for the house; he hired Greg Brady Construction Ltd. to install the trim and siding. The house was completed in December 2001.

[4] The Sargeants last paid Fiegehen on October 19, 2001. Both Aiken and Brady did work after that date. And Fiegehen owed Aiken and Brady money for work done both before and after October 19, 2001. However, neither Aiken nor Brady gave written notice of a lien before October 19. Brady registered a claim for lien on November 23, 2001; his lien was later vacated on the Sargeants' payment into court of an amount sufficient to satisfy the lien. Aiken registered a claim for lien on January 16, 2002. Both Brady and Aiken started construction lien actions in January 2002. Brady claimed $8,187.55, and Aiken claimed $18,594.96. Later, the trial judge ordered the Sargeants to make a further payment, which, together with the money they had already paid into court, satisfied their 10 per cent holdback obligation. These holdback funds were then distributed proportionately to the two lien claimants Aiken and Brady, thus reducing but not extinguishing their claims.

[5] I will set out the relevant dollar amounts on which this appeal turns. These are essentially the amounts found by the trial judge. In the Divisional Court, Hambly J. made minor adjustments to two of the amounts to take account of a mathematical error by the trial judge. I have used Hambly J.'s figures:

-- Total contract price: $138,104.88

-- Sargeants' statutory holdback of 10 per cent of the price of services and materials supplied: $13,810.49

-- Value of work done after October 19, 2001: $12,123.94

-- Value of work done before October 19, 2001: ($138,104.88 - $12,123.94) $125,980.94 [page278]

-- Amount paid by the Sargeants to Fiegehen by October 19, 2001: $124,674.06

-- Amount Sargeants paid into court to vacate Brady lien: $10,234.43

-- Additional amount ordered paid by O'Connor J. to meet 10 per cent holdback: $3,576.06 ($10,234.43 + $3,576.06 = $13,810.49)

[6] The money paid into court and the additional amount ordered by the trial judge (and Hambly J.) have now been paid to Brady and Aiken in proportion to each one's claim. In other words, the owners have paid to these two lien claimants their statutory holdback of 10 per cent [^1].

[7] This litigation arises because at October 19, 2001, the Sargeants had paid the contractor Fiegehen $124,674.06. That was an overpayment in the light of s. 24(1) of the Construction Lien Act, which states:

24(1) A payer may, without jeopardy, make payments on a contract or subcontract up to 90 per cent of the price of the services or materials that have been supplied under that contract or subcontract unless, prior to making payment, the payer has received written notice of a lien.

[8] Brady and Aiken had not given written notice of a lien claim by October 19, 2001. Therefore, under s. 24(1) the owner (the Sargeants) could "without jeopardy" make payments to the contractor (Fiegehen) of up to 90 per cent of "the price of the services or materials that have been supplied under that contract" (emphasis added). The trial judge found that at October 19, 2001, the price of services and materials Fiegehen had supplied was $125,980.94. The Sargeants could, without jeopardy, have advanced 90 per cent of that figure, or $113,382.84. Therefore, at October 19, 2001, the Sargeants had overpaid Fiegehen by $11,291.22 ($124,674.06 - $113,382.84).

[9] Brady and Aiken claim this overpayment in addition to the 10 per cent statutory holdback. The trial judge rejected their claim. He held that the extent of the owners' liability was the statutory holdback. In the Divisional Court, Hambly J. agreed with the trial judge. But the majority of the Divisional Court concluded that Brady and Aiken were also entitled to the overpayment. In the majority's view, when an owner overpays contrary to s. 24(1) and thereby potentially prejudices subcontractors such as Aiken and Brady, it incurs a double liability. [page279]

[10] I respectfully disagree with the majority's conclusion because it is contrary to the statutory scheme and in particular, contrary to s. 23(2) of the Construction Lien Act.

[11] I accept that where an owner overpays contrary to s. 24(1) it puts itself in jeopardy. Here the Sargeants overpaid the contractor, and the contractor did not pay its subcontractors. Thus, the Sargeants exposed themselves to a further payment to the subcontractors to meet their statutory obligation. However, they later satisfied their statutory obligation by the payment of their required holdback.

[12] The Sargeants had no privity of contract with either Aiken or Brady. Their obligation to these subcontractors was solely an obligation created by the Construction Lien Act. Under that statute, the Sargeants' obligation was limited to their basic holdback. This limitation is found is s. 23(2) of the Construction Lien Act, a provision not considered by the majority in the Divisional Court:

23(2) Where the defaulting payer is the contractor, the owner's personal liability to a lien claimant or to a class of lien claimants as defined by section 79 does not exceed the holdbacks the owner is required to retain.

[13] Here the defaulting payer was the contractor Fiegehen. Thus the Sargeants' liability is limited to the holdback the owner was required to retain. That holdback is fixed by s. 22(1) of the statute at 10 per cent of the price of the contract:

22(1) Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired as provided in Part V, or have been satisfied, discharged or provided for under section 44 (payment into court).

[14] In this case, the statutory holdback was $13,810.49, which the Sargeants paid in accordance with the order of the trial judge. That part of the holdback that came from the money paid into court to vacate the Brady lien does not affect the Sargeants' liability under s. 23(2). Carnwath J. essentially made the same point in James Dick Construction Ltd. v. Durham Board of Education (2000), 2000 26990 (ON SCDC), 50 O.R. (3d) 308, [2000] O.J. No. 706 (Div. Ct.), at para. 14, in the following passage with which I agree:

Before the posting of security, the only claim the lien claimants had was a claim to share in the 10 per cent statutory holdback. If Tasis chose to post security to vacate the claims for liens filed against its subcontractor, so the orderly flow of funds could continue to nourish the project, how can this be said to increase the contractor's liability to lien claimants to whom the contractor owes no other duty than to retain the 10 per cent statutory, holdback, and any notice holdback, subject to proper set-off? This interpretation would [page280] leave the contractor in an intolerable position -- either Tasis takes no action and the project is halted in its tracks, or Tasis posts security and exposes itself to a liability it does not otherwise bear. In my view, the Construction Lien Act is framed to insure that funds continue to flow, while also providing security for the holdbacks the payer is required to retain.

[15] In other words, an overpayment contrary to s. 24(1) puts an owner at risk of having to make a further payment to subcontractors. But s. 24(1) does not give the subcontractors a cause of action against the owner to recover an amount in excess of the owner's statutory holdback.

[16] I would allow the appeal, set aside the judgment of the Divisional Court and reinstate the decision of the trial judge, as adjusted by Hambly J. The parties may make written submissions on the costs of the appeal in this court and in the Divisional Court. Those submissions should be delivered within 15 days of the release of the panel's reasons.

Appeal allowed.

[^1]: No other supplier asserted and claim against the holdback.