COURT FILE NO.: 07-31420 (Hamilton)
DATE: 2012/02/21
SUPERIOR COURT OF JUSTICE – ONTARIO
RE: Basic Drywall Inc. v. 1539304 Ontario Inc.
BEFORE: The Honourable Mr. Justice R.A. Lococo
COUNSEL: John K. Lefurgey, for the Plaintiff
Neil S. Abbott, for the Defendant, ICICI Bank Canada
HEARD: January 23, 2012 (in Hamilton)
E N D O R S E M E N T
I. Introduction
[1] ICICI Bank Canada financed a construction project under a building mortgage. Subcontractors registered construction liens against the owner’s property for amounts owed to them by the general contractor. At that time, the total amount the owner owed to the general contractor under the building contract far exceeded the amount that the owner was required to withhold for the benefit of the subcontractors pursuant to section 22 of the Construction Lien Act.[^1]
[2] In order to permit the building project to continue, ICICI Bank paid into court, as security for the subcontractors’ claims, funds drawn down under letters of credit. Ultimately, the property owner was placed in receivership and the property was sold. The proceeds were not sufficient to satisfy the full amount due to ICICI Bank under the building mortgage.
[3] On this motion, the Court has been asked to determine the priority between ICICI Bank and the construction lien claimants with respect to the amount paid into court. According to counsel, the issue to be determined is novel.
[4] The position of Basic Drywall Inc., the Plaintiff lien claimant, is that the amount due for distribution to the subcontractors who registered constructions liens was $276,072.42, the minimum amount the property owner owed to the general contractor for unpaid work certified as complete. The amount paid into court was in excess of that amount.
[5] The position of the Defendant ICICI Bank is that the amount due for distribution to the lien claimants was $50,696.98, the amount of the statutory holdback required under section 22 of the Construction Lien Act. This amount was 10 percent of the total amount certified as complete under the building contract between the owner and the general contractor.
[6] For the reasons set out below, I have concluded that the amount due for distribution to the lien claimants is $50,696.98, as contended by ICICI Bank.
II. Analysis
[7] Subsection 44(6) of the Construction Lien Act provides that when an amount has been paid into court or security has been posted in order to vacate a lien:
the lien ceases to attach to the premises and ceases to attach to the holdbacks and other amounts subject to a charge under section 21, and becomes instead a charge upon the amount paid into court or security posted, and the owner or payer shall, in respect of sections 21, 23 and 24, be in the same position as if the lien had not been preserved or written notice of the lien had not been given.
[8] The position of ICICI Bank, the funding bank and mortgagee of the property, is that after the lien is vacated, the respective priority interests of the mortgagee and lien claimants do not change and continue to be governed by subsection 78(2) of the Construction Lien Act. Under that provision, construction liens have priority over a building mortgage “to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV” of that statute. The amount of that deficiency in this case is $50,696.98, the full amount of the holdback required under subsection 22(1) of the Construction Lien Act, which is included in Part IV of that statute.
[9] As explained further below, I agree with the ICICI Bank that it has priority over the lien claimants with respect to the money paid into court except to the extent of $50,696.98, the amount of the 10 percent statutory holdback that the owner was required to retain for the benefit of the lien claimants.
[10] Contrary to this position, Basic Drywall argued that by paying money into court and vacating the lien, ICICI Bank lost the priority it would otherwise have had as mortgagee under subsection 78(2) of the Construction Lien Act, since under subsection 44(6), the amount paid into court took the place of the property, and the lien claimants’ rights went beyond a charge against the holdback deficiency. However, as explained further below, I do not agree with the Plaintiff’s legal analysis in support of that position. As well, in my view, the Plaintiff’s position does not make commercial sense, since the result would be to create a disincentive for funding lenders to pay money into court or post security in order to vacate liens, which would tend to interfere with the continued flow of funding to building projects.
[11] As a subcontractor that supplied services or materials with respect to the building project, Basic Drywall had a lien upon the interest of the property pursuant to subsection 14(1) of the Construction Lien Act. Under subsection 17(1) of that statute, that lien was limited to the amount owed to Basic Drywall by the general contractor and, subject to the requirements in Part IV of that statute relating to statutory holdbacks, was further limited to “the least amount owed” by the property owner to the general contractor.
[12] According to Basic Drywall, the amount due for distribution to the subcontractors was $276,072.42, the minimum amount owed by the owner to the general contractor. Basic Drywall relied in particular on section 21 of the Construction Lien Act, which provides that a construction lien is a charge upon the holdback required under Part IV of that statute and “any additional 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 material giving rise to the lien”. According to Basic Drywall, the “additional amount” referred to in section 21 was the amount due by the property owner to the general contractor at the relevant time, that is, $276,072.42.
[13] The difficulty with Basic Drywall’s position is that under subsection 78(2) of the Construction Lien Act, it is clear that the priority of the lien claimants over the lender under the building mortgage does not extend beyond the deficiency in the amounts required to be withheld by the owner under Part IV of Construction Lien Act. In this regard, the lien claimants’ priority does not extend to any “additional amount” referred to in section 21, that section being included in Part III of the statute and not Part IV. ICICI Bank acknowledged (and I agree) that in other circumstances, an “additional amount” under section 21 could include so-called “notice holdback” contemplated by subsection 24(2), which is included in Part IV of the Construction Lien Act. That provision requires an additional holdback if a payer has received “written notice of a lien”, even if the lien has not been registered against the property. However, the agreed statement of facts in this case does not include any indication that written notice was provided with respect to a lien that was in addition to the liens registered against the property.
[14] In support of their positions, both parties relied on the Ontario Divisional Court decision in James Dick Construction Ltd. v. Durham Board of Education.[^2] In that case, the general contractor Tasis posted security to vacate a subcontractor’s lien. Both parties to this motion quoted the following passage from that decision:
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 percent statutory holdback and any notice holdback, subject to proper set-off?[^3]
[15] Basic Drywall noted in particular the highlighted words “and any notice holdback” as supporting its position that its priority extended to an amount in addition to the 10 percent statutory holdback. However, I agree with ICICI Bank that there was no evidence of any “notice holdback” in this case as contemplated by subsection 24(2) of the Construction Lien Act. Accordingly, the Dick decision is of no assistance to Basic Drywall’s position, and in fact is consistent with the position taken by ICICI Bank.
[16] Support for ICICI Bank’s position that its priority is not affected by the payment into court is also found in Reliance Electric Ltd. v. G.N.S Contractors Inc., in which the Court concluded that the posted bond became security for the lien only, and not “the full amount claimed as owing in the claim for lien”, and that the value of the lien “remains the same after the posting of the bond as it was before the posting of the bond”.[^4]
IV. Conclusion
[17] Accordingly, an order will go declaring that the sum of $50,696.98 is available for distribution to the construction lien claimants.
[18] If the parties are unable to agree on costs, counsel should contact the trial coordinator with a proposed schedule for written submissions, or alternatively, to arrange a date for oral submissions.
The Honourable Mr. Justice R.A. Lococo
DATE: February 21, 2012
COURT FILE NO.: 07-31420 (Hamilton)
DATE: 2012/02/21
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Basic Drywall Inc. v. 1539304 Ontario Inc.
BEFORE: The Honourable Mr. Justice R.A. Lococo
COUNSEL: John K. Lefurgey, for the Plaintiff
Neil S. Abbott, for the Defendant, ICICI Bank Canada
ENDORSEMENT
Lococo J.
DATE: February 21, 2012
[^1]: R.S.O. 1990, c. C.30, s. 22. [^2]: 2000 CanLII 26990 (ON SCDC), [2000] O.J. No. 3278 (Div. Ct.). [^3]: Ibid at para. 20 [emphasis added]. [^4]: 1989 CanLII 4110 (ON SC), [1989] O.J. No. 1815 (H.C.)