Court File and Parties

COURT FILE NO.: 21-00000615-0000 DATE: 20240412 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

DEMIKON CONSTRUCTION LTD. Plaintiff – and – OAKLEIGH HOLDINGS INC., AURELIA LIMITED PARTNERSHIP, WESTMOUNT GUARANTEE SERVICES INC., and CENTURION MORTGAGE CAPITAL CORPORATION Defendants

Counsel: Robert J. Kennaley, for the Plaintiff Jonathan Goode, for the Defendants Oakleigh and Aurelia

HEARD: February 29, 2024

REASONS ON MOTION

McCarthy J.

Background

[1] Aurelia Limited Partnership and Oakleigh Holdings Inc. (“the defendants”) bring a motion for an order partially reducing the security posted by them in the amount of $5,085,812.66 (“the lien security”) to vacate the claim for lien of the plaintiff in the amount of $5,035,812.66 (“the claim for lien”) which was registered against a condominium project known as the Matchedash Lofts in Orillia, Ontario (“the project”).

[2] The motion is brought pursuant to section 44(5) of the Construction Act, R.S.O. 1990, c. C.30 (“the Act”).

[3] The plaintiff had been the construction manager on the project which was governed by a standard form Construction Management Contract between the plaintiff and the defendant (“the contract”). Following the termination of the contract by the defendant on March 29, 2021, the plaintiff registered its claim for lien on March 31, 2021. It then commenced the within action 30 days later.

[4] The plaintiff’s claim for lien was supported by the Demikon Lien Accounting which appears to have been generated on or about March 24, 2021 (“the lien accounting”).

[5] The defendants posted the lien security on May 7, 2021.

[6] Between March 5, 2021, and April 6, 2022, the defendants contend that they made direct payments in respect of outstanding accounts of many of the plaintiff’s subcontractors and suppliers (“direct subcontractor payments”) which were included in the claim for lien. Those payments totaled $4,276,503.50. The defendants calculate that the direct subcontractor payments included $2,165,321.14 for payment holdbacks.

[7] The defendants acknowledge that the lien accounting provided credit for direct subcontractor payments totaling $722,278.67 made prior to the registration of the lien. The claim for lien includes allowance for that credit. The defendants thus seek a court order that the lien security be reduced by the amount of $3,554,224.83 to account for the direct subcontractor payments for which they have not received credit.

The Act

[8] The relevant provisions of the Act for the purposes of this motion read as follows:

Creation of lien

14.(1) A person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials.

17.(1) The lien of a person is limited to the amount owing to the person in relation to the improvement and, subject to Part IV (holdbacks), it is further limited to the least amount owed in relation to the improvement by a payer to the contractor or to any subcontractor whose contract or subcontract was in whole or in part performed by the supply of services or materials giving rise to the lien.

Idem

(2) Subject to Part IV, the total value of the liens of all members of a class, as defined in section 79, is limited to the least amount owed in relation to the improvement by a payer to the contractor or to any subcontractor whose contract or subcontract was in whole or in part performed by the supply of services or materials made by the members of the class.

Set off

(3) Subject to Part IV, in determining the amount of a lien under subsection (1) or (2), there may be taken into account the amount that is, as between a payer and the person the payer is liable to pay, equal to the balance in the payer’s favour of all outstanding debts, claims or damages, whether or not related to the improvement.

Basic holdback

22.(1) Each payer under 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 until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act.

Direct payment to person having lien

28. Where an owner, contractor or subcontractor makes a payment without obligation to do so to any person having a lien for or on account of any amount owing to that person for services or materials supplied to the improvement and gives written notice of the payment or the intention to pay to the proper payer of that person, the payment shall be deemed to be a payment by the owner, contractor or subcontractor to the proper payer of that person, but no such payment reduces the amount of the holdback required to be retained under this Part or reduces the amount that must be retained in response to a written notice of lien given by a person other than the person to whom payment is made.

Discharge of lien

29. Payments made in accordance with this Part operate as a discharge of the lien to the extent of the amount paid. R.S.O. 1990, c. C.30, s. 29.

44(5) Where an amount has been paid into court or security has been posted with the court under this section, the court, upon notice to such persons as it may require, may order where it is appropriate to do so,

(a) the reduction of the amount paid into court, and the payment of any part of the amount paid into court to the person entitled; or

(b) the reduction of the amount of security posted with the court, and the delivery up of the security posted with the court for cancellation or substitution, as the case may be.

The Defendants’ Position

[9] The defendants argue that s.44(5) allows the court to reduce lien security by ordering the payment of any part of that lien security to the person entitled where it is “appropriate” to do so. Pursuant to s. 17, the lien of a party is limited to the amount owing to that party in relation to the improvement. Section 28 permits an owner to make a payment without obligation to do so to any person having a lien for, or on account of any amount owing to that person, for services or materials supplied to the improvement upon notice to the proper payer of that person. Read in conjunction, these sections make it plain and obvious that the scheme in the Act is designed to allow for reduction of lien security where the lien of a party under s. 17 is reduced by a direct payment under s. 28. Indeed, s. 28 says as much when it states that the payment “shall be deemed to be a payment by the owner… to the proper payer of that person”.

[10] The maximum amount for the claim for lien, once appropriate credits are given for s. 28 payments is only $1,531,587.83 ($5,085,812.66 less $3,554,224.83 in s. 28 payments). The lien security should be reduced accordingly or a corresponding amount paid to the defendants.

The Plaintiff’s Position

[11] The plaintiff asserts that the “security reduction” exercise under s.44(5) is akin to a summary judgment motion and is not for the determination of substantive issues of fact or law. It is far too simple to characterize a motion under s. 44(5) as a mere accounting exercise. The motion is not a substitute for a lien trial.

[12] The plaintiff should be entitled to maintain its claim for lien for the entirety of the contract price pending full adjudication. There is no authority in law to support the proposition that any of the direct subcontractor payments made by the defendants should operate to reduce the amount owing to the plaintiff. Section 28 does not apply to these payments because the subcontractors were not “lien claimants”.

[13] Furthermore, there is no reliable evidence upon which this court can determine what portion of the subcontractor costs included by the plaintiff in its claim for lien have been paid by the defendants.

[14] The moving party’s materials are not reliable. Neither of the affiants are qualified accountants. The information that they have provided is convoluted. The plaintiff cannot follow the logic or process of the analysis.

Governing Case Law

[15] The governing legal test for motions brought under s.44(5) has been accurately set out by my brother Boswell J. in Pentad Construction Inc. v. 2022988 Ontario Inc., 2021 ONSC 824 (“Pentad”), at para. 80:

[T]he court is entitled to reduce the amount of the security posted to vacate a lien “if the evidence supporting the calculation of the claim for lien fails to establish a reasonable basis for the amount claimed.

[16] In Pentad, the court held that an evidentiary record on a s. 44(5) motion should be approached much like a record on a summary judgment motion: at para. 82. The court went on to state that s. 44(5), “offers a mechanism by which to determine, in a summary fashion, whether the amount claimed in a claim for lien is reasonable”: at para. 88.

[17] At para. 89 of Pentad, the court summarized the approach to adhere to on a s. 44(5) motion:

(a) The moving party bears the legal and persuasive burden to establish that there is no reasonable basis for the amount claimed; (b) The responding party bears an evidentiary burden to establish that there is a reasonable basis for the amount claimed; (c) Each party must put their “best foot forward” in the evidentiary record; (d) The court is entitled to assume that the record before it contains the core substance of the evidence that the parties will present at trial.

[18] At para. 71 and 72 of Pentad, the motions judge emphasized how the Act was intended to provide a summary process for the determination of the claims of unpaid contractors. Section 67(1) of the Act (now s. 50(3) of the Construction Act, R.S.O. 1990, c. C.30) provided that the procedure in an action under the Act is to be “as far as possible of a summary character, having regard to the amount and nature of the liens in question.” The court added that, “[t]ime-consuming interlocutory motions, particularly ones requiring a deep dive into the merits of the claim, are antithetical to the summary character of the procedures established by the legislation.”

[19] In addressing the purpose of section 44, Boswell J. cited the decision of the Divisional Court in H.I.R.A. Ltd. v. Middlesex Standard Condominium Corp. No. 823, 2018 ONSC 5931, and stated as follows:

[76] Section 44 of the CLA provides the mechanics for parties to vacate registered liens upon providing alternative security. Its subsections appear to me to be designed to ensure that what is required as security to vacate a lien is what is reasonable in the circumstances – no more, no less.

[77] Sub-section 44(2) authorizes the court to vacate a claim for lien upon the posting of security in an amount deemed reasonable to satisfy the lien.

[78] Sub-section 44(5) authorizes the court to reduce the amount of security otherwise posted to vacate a lien, where appropriate. In my view the phrase “where appropriate”, for all intents and purposes, has the same meaning as “where reasonable”. Any amount that is not reasonable can not be appropriate.

[79] In my view, the Divisional Court’s direction regarding the proper approach to motions under s. 44(2) is equally applicable to motions under s. 44(5) because both sections serve the same purpose – to ensure that an amount of security required to vacate a lien is reasonable.

[80] In the result, the governing test appears to be that the court is entitled to reduce the amount of the security posted to vacate a lien “if the evidence supporting the calculation of the claim for lien fails to establish a reasonable basis for the amount claimed.” See H.I.R.A., para. 10 and HMI Construction Inc. v. Index Energy Mills Road Corp., 2017 ONSC 4075 (Div. Ct.) at para. 25.

[81] The assessment of the evidence in support of, or contrary to, the amount claimed is to be approached much in the same way that the evidentiary record is approached on a motion for summary judgment. See H.I.R.A., at para. 8. See also Ben-Air Systems Inc. v. Neilas (799 College St) Inc., 2014 ONSC 7205 (Master) at para. 27.

Analysis

[20] With the greatest respect, I find that the plaintiff seeks to overcomplicate what should really be a straightforward, summary exercise. Perhaps there is no case law touching on the effect of s. 28 payments on lien security because there does not need to be. My review of s.28, viewed in the context of the entire Act, makes it abundantly clear that the section was meant to encompass the very types of payments made in the case at bar. Applying s.28 to the facts before me establishes the following:

i) The defendants were project owners.

ii) The defendants made direct payments without an obligation to do so to subcontractors who either had a lien or had monies owing to them for services or materials supplied to the project.

iii) The defendants provided two separate notices of the payments (on March 29, 2021, and March 28, 2022) to the proper payer of those persons (the plaintiff who hired the subcontractors).

iv) With those pre-conditions satisfied, the payment is deemed to be a payment by the owner to the proper payer of that person (again the plaintiff).

[21] I am not persuaded that s. 28 payments can only be made to persons who have a claim for lien.

[22] First, the section specifically refers to “person having a lien”, not a person with a claim for lien. Section 14 stipulates that a person who supplies services or materials to an improvement to an owner, contractor or subcontractor has a lien upon the interest of the owner in the premise improved for the price of those services or materials. This stands in contrast to the definition of “lien claimant” in s. 1 of the Act which means a person having a preserved or perfected lien. Therefore, a subcontractor receiving a direct subcontractor payment under s. 28 could qualify as a person who has a lien even if that subcontractor was not s.1 lien claimant.

[23] Second, valid s. 28 payments can also be made to any person, “…on account of any amount owing to that person for services or materials.” I take that wording to be expansive: it would encompass person who have an amount owing to them for services and materials. It would not require them to be lien claimants.

[24] I see no reason why payments made under s. 28 payments would not factor into the court’s summary exercise in s. 44(5). Indeed, how could they not? Common sense, fairness, simple accounting, commercial reality, the mechanics of security and the entire scheme and purpose of the Act would all be perverted if direct subcontractor payments were not central to the court’s analysis of a security reduction motion. Moreover, s. 29 clearly stipulates that payments made in accordance with that part of the Act operate as a discharge of the lien to the extent of the amount paid. Section 17(1) of the Act stipulates that the lien of a person is “limited to the amount owing to the person”, while s. 17(3) clarifies that the amount as between payer and the person the payer is liable to pay is “equal to the balance in the payer’s favour of all outstanding debts, claims or damages”. Undoubtedly, the terminology “amount owing” and “balance” contemplates a lien value subject to updating, credits, reductions, and adjustments.

[25] The evidence establishes that the defendants made the direct subcontractor payments. The details are painstakingly set out in their materials. There is no reason to doubt the accuracy and reliability of that evidence. Contrary to plaintiff counsel’s assertion, the information is not at all convoluted. It is necessarily dense and extensive given that it is incorporates dozens of subcontractors, hundreds of invoices, countless back up documents spanning more than a year and involves millions of dollars of payments. The accounting includes cross-references to invoices, bank statements, highlighting of individual transactions and a dissection of batch transactions, cancelled cheques, reconciliation of HST, accounting for holdback, etc. It is entirely transparent. There is no evidence that the direct subcontractor payments were not made. Certainly, there is no evidence from any of the identified subcontractors that the payments were not received. Some of the subcontractors upon receipt of their holdback amounts provided releases for any amounts owed to them in connection with the project (for a total of $952,855.23). There is no evidence from the plaintiff that it too paid these subcontractors. I do not accept the plaintiff’s contention that the defendants’ accounting should be rejected since it has not been completed by a qualified accountant. I found it to be highly professional, comprehensive, accurate, and instructive.

[26] I have no hesitation in concluding that the defendants have put their best foot forward for this motion. The evidence is highly reliable and probative of the issue before the court.

[27] The same cannot be said of the plaintiff. It has provided no updated version of its lien accounting. The plaintiff did not challenge the defendants’ calculations or the methodology in any meaningful way. The plaintiff did not offer a countervailing, up to date lien accounting for the court to consider. Direct subcontractor payments have not been credited since the original lien accounting. The plaintiff has failed to establish a reasonable basis for the $5,035,812.66 claim for lien it advances. The plaintiff has failed to put its best foot forward at a summary motion.

[28] The lien accounting does reveal that, included in the progress draws and invoices, are exact amounts claimed by the plaintiff for the accounts and invoices of the plaintiff’s subcontractors and suppliers for which it claimed supplied services and materials to the project. These exact amounts were set out in the summary page of each plaintiff progress invoice and supported by corresponding invoices from its subcontractors and suppliers.

[29] As well, the lien accounting included the amount of $2,942,618.25 for purported holdback retained by the defendants in respect of progress invoices #1-35, all of which were paid in full by defendant, less the 10% holdback which was retained by the defendants pursuant to the Act.

[30] The plaintiff acknowledged, accounted for and gave credit for direct subcontractor payments made by the defendants prior to registering its claim for lien: for example, subcontractor and supplier charges found in progress draw invoices #33 and #35 do not form part of the claim for lien. In addition, the plaintiff credited the defendant the amount of $722,278.67 to account for some of the payments made to subcontractors included in progress draws 36 and 37.

[31] I struggle to understand on what basis the plaintiff, having initially omitted subcontractor charges paid directly by the owner from its claim for lien, and having then given credit for other such payments in its lien accounting, would then oppose any reduction in the lien security for direct subcontractor payments made by defendants on the same project.

[32] Indeed, the plaintiff’s own representative made the following concession in his affidavit sworn June 30, 2023:

Demikon is willing to credit amounts Aurelia or Oakleigh have paid to a Demikon subcontractor where the amount was included in Demikon’s claim for lien, where it is clear that the payment was for work performed by the subtrade for Demikon in relation to the project for which the subtrade has not been paid and where there is no dispute that the trade is actually owed money.

[33] The plaintiff has furnished the court with no credible evidence that the direct subcontractor payments were not made, that their invoices were not for work performed on the project or that the subtrade was not owed the money. Indeed, the s.28 payments were made to subcontractors whose invoices formed part of the plaintiff’s progress draws and claim for lien.

[34] There is nothing in the wording of s. 28 nor in any authority that I have been referred to that would require a s. 28 “proper payer” (the plaintiff in this case) to agree to or have any input into, an owner’s direct payment to subcontractors. I am not prepared to graft such a condition onto a s. 28 payment.

[35] In my view, it is entirely in keeping with both the purpose and the logic of the Act that lien security should be reduced and accompanying monies refunded at the interlocutory stage where direct subcontractor payments have been made by the project owner, whatever the reason. Absent fraud, the motivation behind the payments hardly matters. The payments were made. The accounts/invoices of subcontractors to whom those payments were made formed part of the plaintiff’s account in support of its lien. The plaintiff has been relieved of the obligation to pay those accounts. The plaintiff’s debt owing to the subcontractors paid directly by the defendant has been extinguished. It is the basic equivalent of a direct part payment on the plaintiff’s account. It amounts to the same thing. I cannot think of a more unfair result than to have the defendants avail themselves of the direct payment provisions in s. 28 on the one hand, only to be denied accompanying relief under s. 44(5). When the present security payment is added to the direct subcontractor payments, one is left with the sum of $9,362,316.16 paid to date by the defendants either to the court or to the plaintiff’s subcontractors on account of this project. On its face, the plaintiff’s lien is over secured. Moreover, the present situation leaves the defendants in the unenviable position of having to shoulder the burden of an unreduced lien security pending the trial of the lien claim. This, after having expended resources in satisfaction of many subcontractors’ accounts.

[36] The plaintiff seems to contend that because its claim for lien is calculated at the contract price, or in this case, for the price of the materials, supplies and labor it provided to the project, that matching security must remain in place for that amount pending final adjudication at a lien trial. I cannot accept such a proposition. It would be an unreasonable outcome if the security posted to a vacate a lien encumbering a project could not be reduced for part payment of a component of what is included in the contract price. Indeed, ss.28 and 29 read in conjunction, contemplate such a reduction. And s. 44(5) is available for the court to grant that relief.

[37] The only evidence before the court regarding the holdback amounts retained from the plaintiff’s subcontractors is set out in the affidavits submitted by the defendants. The present action is the only lien action remaining on the project. The liens of Magest Building Systems and Stubbe’s Precast have now been satisfied. There are no sub-contractor liens on the project. The plaintiff and defendants’ holdback obligations are at an end. Payments for holdback to the sub-contractors have been properly tracked, identified, and accounted for. It would not offend s. 28(5) to allow credit to the defendants for payments made in this regard since those payments were still on account of services and materials supplied to the improvement and can no longer be classified as holdback.

[38] Finally, while the present action is complicated somewhat by the counterclaim, that should have no impact on the reduction of security exercise under s. 28 and s. 44(5).

Disposition

[39] For the foregoing reasons, the defendants’ motion is allowed. The $3,554,224.83 uncredited direct subcontractor payments are found to be valid payments under s. 28 of the Act.

[40] Pursuant to s.44(5) I find that the lien security should be reduced by those s. 28 payments. A reasonable and appropriate amount for lien security is $1,531,587.83. To this should be added the sum of $50,000 to cover potential costs of the lien action. This results in a total of $1,581,587.83.

[41] The security posted with the Accountant of the Superior Court of Justice in the amount of $5,085,812.66 by way of Lien Bond No. 211070007 of Aviva Insurance Company dated May 7th, 2021, by Aurelia Limited Partnership to vacate the claim for lien pursuant to the order of this court dated May 12, 2021, shall be reduced to the amount of $1,581,587.83.

[42] There shall be an order to go in accordance with the above.

[43] Should the parties be unable to agree on the issue of costs or the form and content of any order, they shall take out an appointment to appear before me through the Barrie Trial Coordinator me to address any outstanding issues.

McCarthy J. Released: April 12, 2024