Demikon Construction Ltd. v. Oakleigh Holdings Inc., 2024 ONSC 6261
CITATION: Demikon Construction Ltd. v. Oakleigh Holdings Inc., 2024 ONSC 6261
DIVISIONAL COURT FILE NO.: 1568/24
DATE: 20241213
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
Sachs, Lococo and Howard JJ.
BETWEEN:
DEMIKON CONSTRUCTION LTD.
Robert J. Kennaley and Joseph E. O’Hearn, for the Appellant (Plaintiff)
Appellant (Plaintiff)
– and –
OAKLEIGH HOLDINGS INC. and AURELIA LIMITED PARTNERSHIP
Jonathan Goode and Harris Khan, for the Respondents (Defendants)
Respondents (Defendants)
HEARD at Oshawa: September 20, 2024
REASONS FOR JUDGMENT
R. A. Lococo J.
I. Introduction
[1] The appellant Demikon Construction Ltd. (“Demikon”) appeals the order of Justice John R. McCarthy of the Superior Court of Justice dated April 12, 2024 (the “Motion Decision”), with reasons reported at 2024 ONSC 2151.
[2] Demikon was the construction manager for a mixed-use condominium project owned and developed by the respondent Aurelia Limited Partnership (“Aurelia”). Demikon registered a claim for a construction lien on the title of the project land. The claim for lien was vacated upon Aurelia’s posting security with the court by way of lien bond.
[3] Aurelia subsequently brought a successful motion to reduce the required amount of posted security. The motion judge reduced the required security by the amount that the motion judge found Aurelia had paid directly to Demikon’s subcontractors and suppliers to satisfy outstanding amounts owed to them.
[4] Demikon submits that the motion judge erred in law by, among other things, reducing the posted security by an amount that included payments to subcontractors who did not fall within the statutory definition of a “person having a lien”. Demikon asks the court to set aside the motion judge’s order and dismiss Aurelia’s motion in the court below.
[5] For the reasons below, I would allow the appeal and set aside the motion judge’s order.
II. Background
[6] Aurelia was the developer of a mixed-use (residential and commercial) condominium project in Orillia, Ontario (the “Project”) on land that Aurelia owned (the “Project land”). The respondent Oakleigh Holdings Inc. is Aurelia’s general partner.
[7] In May 2017, Demikon entered into a Construction Management Contract (the “Contract”) with Aurelia to act as the Project’s construction manager. The Contract required Demikon as general contractor to retain and manage subcontractors to perform the necessary work for the Project. Upon the supply of services or materials for the Project, Demikon became entitled to a lien on Aurelia’s interest in the Project land pursuant to s. 14(1) of the Construction Act, R.S.O. 1990, c. C.30. Section 14(1) provides:
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.
[8] By letter dated March 29, 2021, Aurelia notified Demikon that Aurelia was terminating Demikon’s right to perform the work under the Contract. Aurelia alleged numerous delays to the Project, deficiencies in the work of Demikon and its subcontractors, and failures to cure defaults incurred by Demikon. In its letter, Aurelia noted that it had previously sent notices to Demikon of its intention to pay Demikon’s subcontractors for work performed on the Project, or of actual payments made. The letter also stated that Aurelia was providing notice under s. 28 of the Construction Act of its “intention to continue paying certain of Demikon’s subcontractors who have completed work at the Project in order to further mitigate Aurelia’s losses at the Project, including, but not limited to, Magest Building Systems Ltd.” In March 2022, Aurelia provided Demikon with a further notice of intention under s. 28 to make direct payments to Demikon’s subcontractors: see Motion Decision, at para. 20(iii).
[9] Section 28 [which is in Part IV (holdbacks) of the Construction Act] provides:
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 [IV] 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. [Emphasis added.]
[10] As defined in s. 1(1) of the Construction Act:
“person having a lien” includes both a lien claimant and a person with an unpreserved lien;
“lien claimant” means a person having a preserved or perfected lien;
[Emphasis added.]
[11] On March 31, 2021, Demikon preserved its lien against the Project land by registering a Claim for Lien on title in the amount of $5,035,812.66: see Construction Act, s. 34(1)(a). The amount of the Claim for Lien was “supported by the Demikon Lien Accounting which appears to have been generated on or about March 24, 2021”: Motion Decision, at para. 4.
[12] On April 30, 2021, Demikon perfected its preserved lien by commencing a construction lien action and registering a Certificate of Action on the Project land’s title: see Construction Act, s. 36(3)(a). In the Statement of Claim dated April 30, 2021, Demikon sought (among other things) damages for breach of contract and a construction lien on the Project land.
[13] On May 7, 2021, upon Aurelia’s motion under s. 44(1) of the Construction Act, the motion judge ordered that the Demikon’s Claim for Lien and Certificate of Action registered on the title for the Project land be vacated upon Aurelia’s posting security by way of a lien bond in the amount of $5,085,812.66, which included $50,000 as security for costs. Aurelia posted the required security with the court: Motion Decision, at para. 5.
[14] On July 19, 2021, the respondents filed the Statement of Defence and Counterclaim in the construction lien action. Among other things, the respondents (i) contested Demikon’s monetary claims and its entitlement to a construction lien, (ii) alleged breach of contract against Demikon, based on deficiencies and delays in work, and (iii) claimed damages of $6 million for losses incurred. On July 23, 2021, Demikon set the action down for trial.
III. Motion to reduce posted security
[15] By Notice of Motion dated December 23, 2022, Aurelia sought an order that the security Aurelia previously posted be reduced from $5,085,812.66 to “a lesser and reasonable amount determined by the Court pursuant to s. 44(5) of the Construction Act”. Section 44(5) provides:
Reduction of amount paid into court
(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.
[16] On February 29, 2024, the motion judge heard Aurelia’s motion and reserved his decision.
[17] Before the motion judge, Aurelia’s evidence was that it made payments directly to Demikon’s subcontractors in the period between March 5, 2021 (shortly before the Contract’s termination) and April 6, 2022 (more than a year after the termination) totaling $4,276,503.50. By Aurelia’s calculation, those payments included $2,165,312.14 for payment holdbacks required under Part IV of the Construction Act: Motion Decision, at para. 6. Aurelia acknowledged that Demikon’s lien accounting “provided credit for direct subcontractor payments totaling $722,278.67 [that Aurelia] made prior to the registration of the [claim for] lien”, with the result that the amount of those payments had not been included in Demikon’s claim for lien. Therefore, Aurelia sought an order that that the lien security be reduced by $3,554,224.83, being the calculated amount of direct subcontractor payments ($4,276,503.50) less the previously credited amount of $722,278.67: Motion Decision, at para. 7.
[18] On April 12, 2024, the motion judge released the Motion Decision, granting Aurelia’s motion to reduce the posted security by the requested amount. By costs endorsement dated August 14, 2024 (reported at 2024 ONSC 4472), the motion judge awarded Aurelia costs of that motion in the amount of $174,522.94, which included disbursements in the reduced amount of $50,222.94.
[19] In the Motion Decision, at para. 8, in addition to ss. 14, 28 and 44(5), the motion judge set out the following sections of the Construction Act as being relevant for the motion:
Limitation on value of lien
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.
Discharge of lien
- Payments made in accordance with this Part [IV (holdbacks)] operate as a discharge of the lien to the extent of the amount paid.
[20] In the Motion Decision, at para. 16, the motion judge stated that a s. 44(5) motion “offers a mechanism by which to determine, in a summary fashion, whether the amount claimed in a claim for lien is reasonable", citing Pentad Construction Inc. v. 2022988 Ontario Inc., 2021 ONSC 824, at para. 88. The motion judge also noted that the evidentiary record for the motion “should be approached much like a record on a summary judgment motion”, which included an obligation on each party to “put their ‘best foot forward’ in the evidentiary record”: see Motion Decision, at para. 16-17, citing Pentad, at paras. 82, 89.
[21] At para. 40, the motion judge decided that the amount of posted security should be reduced from $5,085,812.66 to $1,531,587.83, which constituted a “reasonable and appropriate amount for lien security”. The difference of $3,554,224.83 was the amount of “uncredited direct subcontractor payments” that the motion judge determined Aurelia had made to subcontractors to satisfy amounts that Demikon owed to the subcontractors: Motion Decision, at para. 39. The motion judge found those amounts to be “valid payments under s. 28 of the [Construction] Act”, also determining that s. 28 “was meant to encompass the very types of payments made in the case at bar”: Motion Decision, paras. 20, 39. In reaching that conclusion, the motion judge found, among other things, that Aurelia “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” (emphasis added): Motion Decision, at para. 20(ii).
[22] Before the motion judge, Demikon argued, among other things, that s. 28 did not apply to the subcontractor payments “because the subcontractors were not ‘lien claimants’”: Motion Decision, at para 12. Demikon further argued that “there is no reliable evidence upon which this court can determine what portion of the subcontractor costs included by [Demikon] in its claim for lien have been paid by [Aurelia]”: Motion Decision, at para. 13. The motion judge rejected both of those submissions.
[23] The motion judge stated, at paras. 21-23:
I am not persuaded that s. 28 payments can only be made to persons who have a claim for lien.
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[s] 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.
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.
[Emphasis added]
[24] Among other things, the motion judge went on to find, at para. 24, that the deduction of direct subcontractor payments from the amount of required security was justified by the combined effect of ss. 28, 29 and 17 of the Construction Act:
[Section] 29 clearly stipulates that [direct subcontractor] payments made in accordance with that part of the [Construction] 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 motion judge also rejected Demikon’s submission that there was a lack of reliable evidence to determine the extent to which subcontractor costs had been paid by Aurelia. The motion judge found, at para. 25, that the “evidence establishes that [Aurelia] 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.” At para. 26, the motion judge found that the respondents “have put their best foot forward for this motion”, describing their evidence as “highly reliable and probative of the issue before the court.”
[26] The motion judge, at paras. 27-33, went on find that Demikon “failed to put its best foot forward” in the evidence it provided on the motion. Among other things, the motion judge faulted Demikon because it “provided no updated version of its lien accounting”, “did not challenge [Aurelia’s] calculations or the methodology in any meaningful way”, and “did not offer a countervailing, up to date lien accounting for the court to consider”: Motion Decision, at para. 27.
[27] The motion judge, at para. 37, also determined that the requirement that direct payments under s. 28 not reduce the required amount of holdback was not an issue in this case. The motion judge found that Aurelia’s payments to subcontractors “can no longer be classified as holdback” since, among other things, the “present action is the only lien action on the project”, other known liens “have now been satisfied”, and there are “no other subcontractor liens on the project.” The motion judge further found that “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)”: Motion Decision, at para 38.
[28] By Notice of Appeal dated April 24, 2024, Demikon appeals the Motion Decision.
IV. Jurisdiction and standard of review
[29] The Divisional Court has jurisdiction to hear this appeal. An appeal from a judgment under the Construction Act lies to the Divisional Court as of right, but leave is required to appeal an interlocutory order: Construction Act, ss. 71(1), 71(3). An order that “reduces a portion of the claim [for lien] from being secured to unsecured determines a substantive issue and deprives the lien claimant of certain legal rights. Such an order is a final order and can be appealed” to the Divisional Court under s. 71(1) without leave: see H.I.R.A Ltd. v. Middlesex Standard Condominium Corp. No. 823, 2018 ONSC 3661, 61 C.B.R (6th) 59 (Div. Ct), at para. 22.
[30] The appellate standards of review apply, as set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 8, 10, 19, 26-37.
[31] The standard of review is correctness for questions of law, including legal principles readily extricable from questions of mixed fact and law.
[32] The standard of review is palpable and overriding error for questions of fact and for questions of mixed fact and law (where the legal principle is not readily extricable) including with respect to the application of correct legal principles to the facts.
V. Principles of statutory interpretation
[33] This judicial review application raises issues with respect to the interpretation of s. 28 of the Construction Act and its interaction with other provisions of that statute.
[34] In Rizzo & Rizzo Shoes Ltd. (Re), 1998 837 (SCC), [1998] 1 S.C.R. 27, at para. 21, the Supreme Court concisely set out the modern principle of statutory interpretation (as previously formulated in Elmer A. Driedger, Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983), at p. 87):
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
[35] In Blue Star Trailer Rentals Inc. v. 407 ETR Concession Company Limited, 2008 ONCA 561, 91 O.R. (3d) 321, at para. 23, after stating that principle, the Court of Appeal continued:
This approach to statutory interpretation -- sometimes referred to as the textual, contextual or purposive approach -- requires an examination of three factors: the language of the provision, the context in which the language is used and the purpose of the legislation or statutory scheme in which the language is found.
VI. Parties’ positions
A. Demikon’s position
[36] Demikon submits that the motion judge made errors of law in interpreting s. 28 of the Construction Act. On its face, s. 28 only authorizes payments (i) to persons meeting the statutory definition of a “person having a lien”, and (ii) which do not reduce required holdback. Demikon submits that this interpretation is confirmed by authoritative legal commentators, including those involved in the developing the current version of construction lien legislation.
[37] Demikon argues that the motion judge erred in finding, at para. 20, that the scope of s. 28 extends beyond payments to a “person having a lien” to include payments to a subcontractor who “had monies owing to them for services or material supplied to the project” irrespective of whether the subcontractor was a “person having a lien”. According to Demikon, that interpretation ignores the requirement in s. 28 that the lien be “for an amount owing to that person”, which modifies the prior reference in s. 28 to a “person having a lien”.
[38] Further, the motion judge, at para. 6, expressly found that the direct payments to subcontractors included “$2,165,321.14 for payment holdbacks”. By the express terms of s. 28, direct payments to subcontractors under that section do not reduce the amount of holdback required under that Act.
[39] Among other things, Demikon also submits that s. 28 cannot apply to Aurelia’s direct payments to subcontractors, because, on the record and with one minor exception, there is no evidence that the payments were made to persons having a lien. As well, while Demikon does not challenge the motion judge’s analogizing a motion under s. 44(5) to a summary judgment motion, Demikon submits that the motion record contained detailed evidence (not challenged by Aurelia on cross-examination) establishing that the amount of security Aurelia had previously been required to post was appropriate and reasonable.
B. Aurelia’s position
[40] Aurelia disagrees. Aurelia submits that the findings that Demikon challenges relate exclusively to questions of fact or mixed fact and law. Aurelia says that Demikon has not established any palpable and overriding error that would justify interfering with the Motion Decision. Aurelia also submits that Demikon’s interpretation of s. 28 is inconsistent with the modern approach to statutory interpretation, which requires that the words of a statute to be read “in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”: Rizzo, at para. 21; Blue Star, at paras. 22-23.
[41] Among other things, Aurelia argues that Demikon’s position that s. 28 does not apply to payments to a subcontractor who is not a “person having a lien” ignores the remaining language of s. 28, under which direct payments may be made “on account of any amount owing to that person for services or materials”. That language indicates that s. 28 is an expansive provision that is clearly not restricted to payments to lien holders. Aurelia submits that Demikon’s interpretation of s. 28 does not accord with the requirement that legislation be interpreted as “remedial” and given “such fair, large and liberal interpretation as best ensures the attainment of its objects”: Legislation Act, 2006, S.O. 2006, c. 21, Sched. F, s. 64(1).
VII. Analysis and conclusion
[42] As explained below, I have concluded that the motion judge erred in interpreting the scope of s. 28 of the Construction Act. To the extent that the motion judge’s analysis related to questions of mixed fact and law, he erred with respect to an extricable question of law, reviewable on a correctness standard.
[43] By its terms, s. 28 applies to direct payments made by third parties “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”. In s. 1(1) of the Construction Act, “improvement” is defined as follows:
“improvement” means, in respect of any land,
(a) any alteration, addition or capital repair to the land,
(b) any construction, erection or installation on the land, including the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land, building, structure or works, or
(c) the complete or partial demolition or removal of any building, structure or works on the land;
[44] Properly interpreted, s. 28 applies to direct payments to a “person having a lien” relating to “any amount owing to that person for services or materials supplied to the improvement” (emphasis added). The motion judge’s error was interpreting the latter quoted words as expanding the scope of s. 28 to include payments to other subcontractors who were not persons “having a lien”, who may include (i) subcontractors who supplied equipment or other chattels (or related services) that did not form part of an “improvement” in the land as defined in the Construction Act, and (ii) subcontractors who previously had a lien that has since expired by operation of the Construction Act or had otherwise resolved. The use of the words “owing to that person” in s. 28 is inconsistent with the motion judge’s conclusion that the scope of s. 28 extends beyond direct payments to a “person having a lien”. Otherwise, including the words “owing to that person” in s. 28 would serve no purpose.
[45] Consistent with that interpretation, in Harvey J. Kirsh & Matthew R. Alter, A Guide to Construction Liens in Ontario, 3rd ed. (Toronto: LexisNexis Canada, 2011), at pp. 84-85, the application of s. 28 was interpreted as not extending beyond direct payments to a “person having a lien”:
Section 28 of the Construction Lien Act provides that, where an owner, contractor or subcontractor makes a direct payment to “any person having a lien” with whom he or she does not have privity of contract, that payment is deemed to be a payment to the person who was contractually obliged (i.e., “the proper payer”) to pay the person having the lien. In these circumstances, the amount so paid may be deducted from the debt owing to the proper payer of the person having the lien, but only so long as written notice of the actual payment or the intention to pay is given to the proper payer. [Emphasis added.]
[46] That interpretation is also consistent with the commentary relating to s. 28 of the draft Construction Lien Act (the predecessor to the current legislation) contained in Ministry of the Attorney General, Report of Attorney General's Advisory Committee on the Draft Construction Lien Act (Toronto: April 1982),[^1] at pp. 71-72. The Attorney General appointed that Committee to prepare a report on recommended changes to rework and replace the Mechanics Lien Act, R.S.O. 1980, c. 261. The Committee’s report has been frequently referenced in other cases.
[47] Limiting the scope of the s. 28 payments to persons having a lien makes sense when considered in the context of the statutory scheme and the purpose of the legislation. While a person has a lien, they have an interest in the owner’s premises and in the holdbacks: Construction Act, ss. 14, 21. The owners have an interest in seeing liens resolved because their lands can be tied up and because they have holdback obligations. This interest, however, disappears once the liens expire or are resolved. Once the liens expire, there is no practical reason under the Construction Act to allow payors to ‘jump the rung’ to avoid privity of contract, which is what s. 28 permits. This analysis is consistent with the conclusion that s. 28 “merely provides a method of preventing the registration of a lien or to facilitate the removal of a lien already registered”: see David Bristow, Duncan Glaholt & R. Bruce Reynolds, Construction Builders’ and Mechanics’ Liens in Canada, loose-leaf, 7th ed. (Toronto: Carswell, 2005, rev. to 2018), at p. 4-27.
[48] In light of the motion judge’s fundamental error in interpreting s. 28, it is unnecessary to further address Demikon’s other submissions, including those related to holdback and the motion judge’s evidentiary determinations.
[49] As previously noted, the motion judge reduced the required amount of posted security by the amount that he found, at para. 39, to be “valid payments under s. 28” of the Construction Act. Given his error as to s. 28’s scope, he did not make findings of fact on the extent that Aurelia made direct payments to subcontractors that met the statutory definition of a “person having a lien” and otherwise fell within s. 28. The record on appeal does not provide a basis for making that determination. In these circumstances, the motion judge’s order cannot stand.
VIII. Disposition
[50] Accordingly, I would allow the appeal and set aside the motion judge’s order dated April 12, 2024 and the costs order dated August 14, 2024. This result would not preclude the respondents from revising their motion or bringing a fresh motion under s. 44(5) in accordance with these reasons should they wish to do so.
[51] In an accordance with the parties’ agreement, I would also order the respondents to pay to Demikon the costs of the appeal in the amount of $32,500 and the costs of the motion below in the amount of $80,000.
___________________________ Lococo J.
I agree
___________________________ Sachs J.
I agree
___________________________ Howard J.
Date: December 13, 2024
CITATION: Demikon Construction Ltd. v. Oakleigh Holdings Inc., 2024 ONSC 6261
DIVISIONAL COURT FILE NO.: 1568/24
DATE: 20241213
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Sachs, Lococo and Howard JJ.
BETWEEN:
DEMIKON CONSTRUCTION LTD.
Appellant (Plaintiff)
– and –
OAKLEIGH HOLDINGS INC. and AURELIA LIMITED PARTNERSHIP
Respondents (Defendants)
REASONS FOR JUDGMENT
R. A. Lococo J.
Date: December 13, 2024
[^1]: The Committee’s report is included as Appendix A to Bristow, Glaholt & Reynolds, referred to below.