CITATION: Homes by DeSantis (Lake) Inc. v. Sutton Forming Inc., 2023 ONSC 2628
DIVISIONAL COURT FILE NO.: DC-22-00000125
(St. Catharines) DATE: 20230505
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
D.L. Corbett, Nishikawa and O’Brien JJ.
BETWEEN:
HOMES BY DeSANTIS (LAKE) INC.
Michael Cooper, for the Appellant
Appellant
– and –
SUTTON FORMING INC., PILOSIO
Theodore B. Rotenberg, for Halton Forming
CANADA INC., and HALTON FORMING
(High Rise) Ltd.
Michael C. Mazzuca and Derek K. Kim, for
Sutton Forming
Rob Moubarak and Jonathan Frustraglio,
for Pilosio
Respondents
HEARD at Toronto (by videoconference):
November 2, 2022
REASONS FOR DECISION
D.L. Corbett J.
[1] This is an appeal from the decision of J.A. Ramsay J. dated February 25, 2022 (2022 ONSC 1309), ordering release of holdback funds payable by the appellant to the respondents Sutton and Pilosio, pursuant to s. 67 of the Construction Act, RSO 1990, c. C.30 (The “Act”).
Background
[2] The appellant, DeSantis, is the owner and developer of a condominium project in Grimsby Ontario known as “AquaZul Waterfront Condominiums” (the “Project”). On December 20th, 2017, DeSantis entered into a contract for materials and services in respect to the Project (the “Contract”) with the respondent Halton Forming, a concrete-forming contractor.
[3] On December 27, 2017, Halton Forming entered into a subcontract under the Contract with the respondent Sutton (the “Sutton Subcontract”), pursuant to which Sutton agreed to perform all of Halton Forming’s work under the Contract.
[4] Sutton subsequently entered into six sub-subcontracts (the “Sub-Subcontracts”) under the Sutton Subcontract. One of Sutton’s sub-subcontractors was the respondent Pilosio.
[5] Substantial work was done on the Project, and by June 20, 2019, DeSantis wrote to Halton Forming in anticipation of completion of the Contract, stating that it expected Halton Forming to demobilize from the Project by the end of August 2019. In July 2019, DeSantis’ construction manager and payment certifier, M.L.M. Management Group (“MLM”), certified that the Contract was over 95% complete as of June, 2019.
[6] DeSantis was required to pay Halton Forming by August 20, 2019 on the basis of MLM’s July 2019 certification. DeSantis did not do so. As a result of not being paid by DeSantis, Halton Forming did not make payments it owed to Sutton. As of September 2019, Sutton claims it is owed $1,153,174.38 for services and materials provided to the Project under the Sutton Subcontract.
[7] On October 3, 2019, Sutton registered a claim for lien in the amount of $1,153,174.38. On November 26, 2019, Sutton perfected its lien by commencing an action against Halton Forming and DeSantis.
[8] The sub-subcontractors, including Pilosio, all registered claims for lien, and those claims were “sheltered” under the perfected claim of Sutton within the meaning of the Construction Act.
[9] On August 4th, 2020, Sutton advised DeSantis that the minimum undisputed holdback was sufficient to satisfy the full value of the Sutton sub-subcontractors’ claims for liens that that money should be promptly released. By September 2020, DeSantis and Sutton had settled and paid the lien claims of four of the sub-subcontractors with a corresponding reduction in the minimum holdback owed to Sutton.
[10] DeSantis had not paid the claims of sub-subcontractors Pilosio and Hi-Lite, leading to the motion before J.A. Ramsay J. The order sought on the motion was (a) a declaration of the minimum holdback DeSantis was required to hold, and an order directing payment from that holdback to Pilosio and Hi-Lite of their claims and a payment to Sutton on account of its claims. By the time of hearing of the motion, DeSantis agreed to make the requested payment to Hi-Lite, and this aspect of the order of the motion judge is not challenged on appeal (see para. 59 of DeSantis’ factum before the motion judge, and para. 10 of DeSantis’ factum on appeal).
Decision Below
[11] The motion judge found that the minimum holdback was $638,603. Of this amount, the motion judge ordered DeSantis to pay $148,705 to Sutton, $30,428 to Hi-Lite, and $95,000 to Pilosio. DeSantis appeals all aspects of this decision other than the order in favour of Hi-Lite, which it has paid.
Jurisdiction and Standard of Review
[12] The impugned order is final, and appeal from it lies to this court as of right: Construction Act, s.71(1). As the parties agree, an appellate standard of review applies to this appeal: correctness for questions of law, and palpable and overriding error for questions of fact: Housen v. Nikolaisen, 2002 SCC 33.
Issues on Appeal and Disposition
[13] DeSantis raises the following issues on appeal:
(a) the motion judge erred in finding that DeSantis did not oppose the payment of holdback funds to Pilosio;
(b) the motion judge erred in finding that s. 67 of the Construction Act gives the court discretion to order payment of holdback funds;
(c) the motion judge erred in finding that the minimum holdback is $638,603 and in finding that payments should be made from holdback of $148,705 to Sutton and $95,000 to Pilosio.
[14] In respect to the first issue, I am satisfied on the record below that the motion judge made no palpable and overriding error in finding that DeSantis did not oppose payment of holdback funds to Pilosio. However, in any event, in light of my conclusions on the other issues on appeal, the result would have been the same if DeSantis had opposed payment to Pilosio.
[15] In respect to the second and third issues, the motion judge correctly stated and applied the law, and his factual determinations respecting the minimum holdback and amounts to be paid to Sutton, Hi-Lite and Pilosio disclose no palpable and overriding errors. Therefore, for the following reasons, I would dismiss the appeal.
[16] I start my analysis with issues 2 and 3, since they are sufficient to dispose of the appeal, and I then address issue 1.
Analysis
(a) Issues 2 and 3
[17] The motion below was based on the approach taken to payment of subcontractor liens taken in Urbacon Building Groups Corp. v. Guelph (City), 2009 72065 (Ont. SCJ). The structure of holdback obligations under the Act was correctly summarized in Urbacon as follows (at paras. 20-26):
The Act creates two holdback obligations. The first, sometimes called the “Basic Holdback”, is defined as “10 per cent of the value of the services or materials supplied under a contract or subcontract required to be withheld from payment by Part IV”.
Holdback obligations are owed by any “payer”. A “payer” is defined as an owner, contractor, or subcontractor who is liable to pay for the materials or services supplied to an improvement under a contract or subcontract. Section 22(1) of the Act provides that each payer upon a contract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of services or materials as they are actually supplied under the contract until all liens that may be claimed against the holdback have expired (as provided in Part V of the Act), or have been satisfied, discharged, or provided for under section 44 (payment into court).
In this case, Guelph is a “payer” and was obliged to withhold payment of 10 per cent of the value of goods and services provided under its contract with Urbacon. Urbacon is a “payer” and was obliged to withhold 10 per cent of the value of the goods and services provided under its contracts with its subcontractors and suppliers.
Section 21 of the Act provides that the lien of a person is a charge upon the holdbacks required to be retained under Part IV of the Act, and, subject to subsection 17(3) of the Act, any additional amount owed by the payor to the contractor on the contract which was performed, in whole or in part, by the supply of services or materials giving rise to the lien. The holdbacks required to be retained under Part IV of the Act is the Basic Holdback, already described. The lien is a charge against the Basic Holdback, and also against “any additional amount owed” on the contract. This second aspect of the charge is sometimes referred to as the “Additional Holdback”.
There are important distinctions between the “Basic Holdback” created under Part IV, and the “Additional Holdback” described in s.21. Most notably for this motion, the charge created by s.21 is “subject to s.17(3)” in respect to the Additional Holdback. It is not “subject to s.17(3)” in respect to the Basic Holdback.
Subsection 17(3) of the Act permits a payer to set off outstanding debts, claims and damages claimed from a contractor against the amount owed to that contractor for work done on the project.
The combined effect of ss.21 and 17(3) is this. Subcontractor liens are a charge against the whole of the amount owed by the owner to the contractor under the contract. However, the owner is entitled to set off claims against the contractor in calculating the overall obligation, provided, however, that set-off claims cannot be applied to reduce the owner’s obligation below the amount of the Basic Holdback created in s. 22(1).[^1] Thus Guelph’s minimum liability to the subcontractors is the lesser of the Basic Holdback and the aggregate of all valid and subsisting subcontractor lien claims.
The statements of principle apply to the case at bar. DeSantis is the owner and is in the same position as Guelph was in the Urbacon case. Halton Forming is the Contractor and is in the same position as Urbacon. Sutton is a “Subcontractor” and is in the same position as the subcontractors in the Urbacon case. Pelosio is a sub-subcontractor, which makes it a “subcontractor” of Sutton.
[18] As stated in principle in Urbacon, DeSantis, as the owner, was required to withhold payment of 10 per cent of the value of materials and services provided to the improvement under the Contract. This is the “basic holdback” under the Act and is a fund for the benefit of Halton Forming’s subcontractors, in this case, Sutton. Halton Forming, in turn, was required to withhold payment of 10 per cent of the value of materials and services provided under the Sutton Subcontract. This, too, is a “basic holdback” under the Act and is a fund for the benefit of Sutton’s subcontractors – in this case the sub-subcontractors, including Pilosio.
[19] The motion judge correctly cited and followed Urbacon (Decision, para. 14b). The motion judge calculated DeSantis’ minimum basic holdback obligation relying on MLM’s payment certificate as applied to the Contract price to arrive at a basic holdback figure of $638,603. This was the correct way in which to proceed.
[20] DeSantis argues that the motion judge erred in calculating the minimum basic holdback as he did. The motion judge considered DeSantis’ objections and found as follows on this point:
The certificate was given by DeSantis’ own agent under the contract. The contract gives it [DeSantis] a time in which to issue an amending certificate, which it has not done. Its objections to the certificate are not particularized or documented. It has not discharged its onus to disprove the contract price and level of completion. DeSantis is not in any event entitled to set deficiency claims off against the holdback. See s. 30 of the Act.
I agree with this analysis, and the factual findings within it disclose no palpable and overriding error and were available to the motion judge. The certificate was evidence of the value of goods and services provided under the Contract. The motion judge was entitled to reject bald assertions by DeSantis respecting calculation of the basic holdback, and the motion judge was entitled to rely on DeSantis’ failure to correct the payment certificate. Alleged deficiencies may not be set off against basic holdback, a fundamental point stated in Urbacon and applied by the motion judge.
[21] DeSantis argues that the motion judge effectively granted summary judgment on contested subcontractor claims. It argues that he was not entitled to do this without a motion for summary judgment and without a proper record meeting the test for summary judgment. The motion judge reasoned as follows in respect to this objection:
Section 67 of the Act gives me the power to follow a procedure that is “as far as possible of a summary character.” I interpret “as far as possible” to mean that I can make an order provided the record is sufficient to let me decide the question fairly and efficiently without the need for further procedure, something like summary judgment. The interlocutory proceeding is permitted by s. 67(2), as it will expedite the resolution of the issues in the dispute. 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: Urbacon v. Guelph (City), [2009] O.J. No. 5531 (SCJ). Sutton is not at the lower end of the pyramid, but it, too, is entitled to protection.
I would also note as follows in the context of this case. Sutton and Halton Forming agreed to the payments to Sutton’s subcontractors. Those payments are a credit to the balance owed to Sutton by Halton Forming, and a credit to the balance owed to Halton Forming by DeSantis. Halton Forming agreed to the payment to Sutton. The Contract is a stipulated price contract. DeSantis has no interest in the accounting between Sutton and its subcontractors, or between Halton Forming and Sutton.
[22] I appreciate that deficiency claims – and consequent set-off claims – may be asserted at each rung of the construction ladder. To the extent that such claims are asserted at each rung of the ladder, this may impact on the availability for an early order for payment from holdback. That is not this case. A deficiency claim by owner against contractor does not impede payments from basic holdback to subcontractors and their suppliers in the absence of parallel deficiency claims at each applicable rung of the construction ladder.
[23] DeSantis argues that once security is posted to bond a lien off title, it has discharged its holdback obligations, and a set off claim may be pursued. This argument is inconsistent with the plain language, intent, and effect of the holdback provisions of the Construction Act, and would enable a payer to defeat its holdback obligations. This argument is utterly without merit.
[24] I would not give effect to DeSantis’ arguments respecting Issues 2 and 3: the motion judge followed established precedent, his factual findings are rooted in the record, and he had jurisdiction to proceed as he did by virtue of s. 67 of the Act. Payment out of the sub-subcontractors is entirely in keeping with the spirit of the Construction Act. The partial payment ordered in favour of Sutton reflects the amount to which Halton Forming was prepared to agree, Halton Forming being the only party entitled to assert a set off against monies owed to Sutton.
Issue 1
[25] In light of my conclusions respecting Issues 2 and 3, it matters not whether DeSantis opposed a payment to the sub-subcontractors. In any event, the motion judge’s conclusion that DeSantis did not oppose payment to the sub-subcontractors is rooted in the record below. DeSantis responded to the motions of Sutton and Halton Forming; it did not respond to the motion brought by the sub-subcontractors. The aggregate amount sought by the sub-subcontractors was about $125,000, less than 20% of the minimum basic holdback as found by the motion judge. As a matter of common sense – and as a matter of the evidence before the motion judge (DeSantis’ own payment certifier had calculated the value of services and materials provided to the Project at close to $7 million), it was clear on the face of the motion materials that the minimum basic holdback was far more than sufficient to pay out the sub-subcontractors and remove them from the litigation.
Costs
[26] The costs claimed are high, given the nature of the appeal. On the other hand, this motion is a small skirmish in the larger dispute, the sub-subcontractors were put to unreasonable expense to fend off this appeal, given the amounts in issue for them. The bill of costs of the appellant are generally in line with the costs claims of the respondents, and the appellant had to have known it would face three sets of claims for costs in respect to the appeal. Each of the respondents had a distinct interest in the appeal and each was entitled to defend it: as counsel for Halton Forming noted in argument, there is no lien for interest, and continued non-payment could leave Halton Forming in the position of being liable to Sutton for interest for which it is not secured as against DeSantis. Each party below a payer on the construction “ladder” has an interest in seeing timely flow of funds down the ladder.
Order
[27] The appeal is dismissed, with costs payable by the appellant to the respondents, payable within thirty days, in the following amounts:
(a) $12,000 inclusive to Pilosio;
(b) $12,000 inclusive to Sutton; and
(c) $10,000 inclusive to Halton Forming.
I agree: _______________________________
Nishikawa J.
I agree:
O’Brien J.
Date of Release: May 5, 2023
CITATION: Homes by DeSantis (Lake) Inc. v. Sutton Forming Inc., 2023 ONSC 2628
DIVISIONAL COURT FILE NO.: DC-22-00000125
(St. Catharines) DATE: 20230505
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
D.L. Corbett, Nishikawa and O’Brien JJ.
BETWEEN:
Homes by DeSantis (Lake) Inc.
Appellant
– and –
Sutton Forming Inc., Pilosio Canada Inc. and Halton Forming (High Rise) Ltd.
Respondents
REASONS FOR DECISION
D.L. Corbett J.
Date of Release: May 5, 2023
[^1] Similarly, the contractor may assert set-off claims as against its own subcontractors. However, it appears there are no such set-off claims material to calculating of Guelph’s Basic Holdback obligation [this footnote included in the Urbacon decision].