ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-11-0258
DATE: 2012-01-13
IN THE MATTER OF THE CONSTRUCTION LIEN ACT, R.S.O. 1990, c. C.30
B E T W E E N:
MAN-SHIELD (NOW) CONSTRUCTION INC.
Roderick W. Johansen , for the Plaintiff
Plaintiff
- and -
RAINY RIVER DISTRICT SCHOOL BOARD
Donald B. Shanks , for the Defendant
Defendant
HEARD: December 21st, 2011, at Thunder Bay, Ontario
Mr. Justice F.B. Fitzpatrick
Decision on Motion
[ 1 ] In this trust action pursuant to the trust provisions of the Construction Lien Act R.S.O. 1990 c. C-30 as amended (the “Act”), Man-Shield (NOW) Construction Inc. (Man-Shield) brings a motion for a declaration that the defendant Rainy River District School Board (“the Board”) holds $895,709.78 in trust for Man-Shield both pursuant to a construction contract between Man-Shield and the Board and Man-Shield also seeks an order for payment to it by the Board in the amount of $895,709.78.
Background
[ 2 ] Man-Shield and the Board entered into a construction contract dated June 3, 2009 (“the Contract”). In the Contract, Man-Shield agreed to build the Robert Moore School (the “School”) located in Fort Frances Ontario. The total contract price was $11,830,000.00
[ 3 ] It was a condition of the Contract that a ten percent holdback would be retained by the Board in compliance with the Act . The Contract also specifically provided that the Board was obligated to make progress payments to Man-Shield on account of the contract price when due in the amount certified by the Board’s consultant together with taxes applicable to such payments.
[ 4 ] The Contract was a CCDC #2 stipulated price contract 2008. Among other things, it provided for payment of the holdback upon certification of substantial performance of the contract work.
[ 5 ] The project was certified substantially complete by the Board’s project consultant on January 24, 2011. Man-Shield arranged for publication of a notice of substantial completion in the Daily Commercial News on February 3, 2011. In accordance with the provisions of the Act , lien periods for the Man-Shield sub-contractors expired March 30, 2011. Prior to the expiration of the lien period, five parties had filed claims for lien against title to the School. Man-Shield filed its lien in the amount of $2,724,713 on March 17, 2011. Man-Shield filed its certificate of action against title to the School on April 20, 2011. The Man-Shield lien action is ongoing. In that action, the Board assets a counterclaim for damages for delay and costs to repair deficiencies.
[ 6 ] The other lien claimants were Central Welding & Iron Works, MIRMIL Custom Millwork, Studio Flooring & Window Coverings and MDZ Builders Ltd. (the “Sub-Trade Lien Claimants”). Three of those lien claimants had direct contracts with Man-Shield. The fourth, MDZ, was a sub-contractor to Central Welding and had no direct contractual relationship with Man-Shield.
[ 7 ] On this motion, Man-Shield filed a supplementary affidavit which provided the Court with an up to date copy of the parcel register for the School and verified the state of the various lien claims as of the date of this motion. The parcel register indicated all the liens of the Sub-Trade Lien Claimants were vacated from title by March 1, 2011.
[ 8 ] Pursuant to the Contract, Certificate of Payment #20, dated April 6, 2011, certified release of holdback in the amount of $1,210,125.61. The Board has made part payments on Certificate #20 to Man-Shield since the motion was originally served in August 2011. According to Man-Shield, the amount currently owning under Certificate #20 is $895,709.78.
The Position of the Parties
[ 9 ] While Man-Shield’s notice of motion did not expressly reference the provisions of Rule 20, the parties have treated this matter as a motion for partial summary judgment. Man-Shield claims the amount held by the Board of $895,709.78 is impressed with a trust pursuant to section 7(1) of the Act . Further Man-Shield claims the provisions of 7(3) and 7(4) of the Act , coupled with the contractual right for payment of the holdback further to Certificate #20 entitles it to an immediate order for partial summary judgment in the amount of $895,709.78.
[ 10 ] The affidavit material of Man-Shield filed on this motion contained a letter from counsel for Man-Shield to counsel for the Board dated May 12, 2011. The letter asserted Man-Shield’s claim for immediate payment and set out a list of unpaid sub-trades, with amounts owing under the heading “holdback amount”. However, other than in respect to the Sub-Trade Lien Claimants, there was no evidence before the Court as to when, or if, written notices of lien were provided to the Board by any other of sub-trades listed in the May 12 th , 2011 letter. Counsel for Man-Shield conceded in argument that if sub-contractor liens were not filed on title by March 26, 2011, these liens had expired according the preservation and perfection rules for liens contained in the Act .
[ 11 ] The Board contends that the $895,709.78 it presently holds does not constitute holdback monies under the Act although it admits these funds are impressed with a trust in favour of Man-Shield. The Board has a delay and deficiency claim which it quantifies at this point to be in the amount of $893,709.78. The Board argues the provisions of s. 12 and 17(3) of the Act , and its allegation that Man-Shield has breached the Contract, makes the issue of set off of its delay and deficiency claim a triable issue that Man-Shield is not entitled to an order for partial summary judgment at this stage in the litigation.
Analysis
[ 12 ] Resolution of this motion requires an analysis of the interplay of several section of the Act . In addition, I have taken into account the recent decision of the Ontario Court of Appeal in Combined Air Mechanical Services Inc . v. Flesch 2011 ONCA 764 , [2011] O.J. No. 5431 and its holdings regarding motions for summary judgment in civil matters. In my view, the sections of the Act relevant to the resolution of the issues raised in this motion are 7, 12, 14, 17(3), 22 and 30. The sections are as follows;
Amounts received for financing a trust
7.1 All amounts received by an owner, other than the Crown or a municipality, that are to be used in the financing of the improvement, including any amount that is to be used in the payment of the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and prior encumbrances, a trust fund for the benefit of the contractor. R.S.O. 1990, c.C.30, s.7(1) .
Amounts certified as payable
(2)Where amounts become payable under a contract to a contractor by the owner on a certificate of a payment certifier, an amount that is equal to an amount so certified that is in the owner’s hands or received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor. R.S.O. 1990, c.C.30, s.7 (2) .
Where substantial performance certified
(3)Where the substantial performance of a contract has been certified, or has been declared by the court, an amount that is equal to the unpaid price of the substantially performed portion of the contract that is in the owner’s hands or is received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor. R.S.O. 1990, c.C.30, s.7 (3) .
Obligations as trustee
(4)The owner is the trustee of the trust fund created by subsection (1), (2) or (3), and the owner shall not appropriate or convert any part of a fund to the owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to the contractor by the owner. R.S.O. 1990, c.C.30, s.7 (4) .
Set-off by trustee
- Subject to Part IV, a trustee may, without being in breach of trust, retain from trust funds an amount that, as between the trustee and the person the trustee is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee’s favour of all outstanding debts, claims or damages, whether or not related to the improvement. R.S.O. 1990, c.C.30, s.12 .
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. R.S.O. 1990, c.C.30, s.14(1) .
Set-off
17(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. R.S.O. 1990, c.C.30, s.17 (3) .
Holdbacks
Basic holdback
- (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). R.S.O. 1990, c.C.30, s.22 (1) .
How holdback not to be applied
- Where the contractor or a subcontractor defaults in the performance of a contract or subcontract, a holdback shall not be applied by any payer toward obtaining services or materials in substitution for those that were to have been supplied by the person in default, nor in payment or satisfaction of any claim against the person in default, until all liens that may be claimed against that holdback have expired as provided in Part V, or have been satisfied, discharged or provided for under section 44 (payment into court). R.S.O. 1990, c. C.30, s. 30 .
[ 13 ] In considering the application of these various sections of the Act to the facts in this matter, the Court was referred to two sections of authoritative texts. The first was from the text, 2005 Annotated Ontario Construction Lien Act (Thompson Carswell pages 159) where authors Duncan W. Glaholt and David Keeshan state;
“There is no right to set off against the holdback fund. The inviolable nature of holdbacks survives as long as the holdback can be characterized as such. This characterization terminates when all the lien rights against the holdback have expired, or have been satisfied, discharged, or vacated from title. As long as the lien rights subsist, the owner or person primarily liable cannot defray the cost of completion rectifying deficiencies by claiming a set-off against the holdback fund. When the holdback can no longer be considered a holdback, s. 17(3) of the Act would apply and the owner or person primarily liable would be entitled to use the funds of the defaulting contractor for set-off purposes”.
[ 14 ] The Court was also referred to a Construction Lien Remedies in Ontario 2 nd Edition (Toronto: Carswell 1997 pages 218) where author Kevin P. McGuiness states
“s.7.29 The immunity of the holdback against set-off does not apply where the time for preserving liens has expired, and the only lien claimant is the party from whom the holdback has been withheld. The purpose of the holdback is to protect suppliers who lack privity of contract with a payer who is entitled to claim a set-off. It is not intended to allow a supplier to recover a portion of the amount owing to him (or her), despite his own breach of contract”.
[ 15 ] There is no question that some or all of the $895,709.78 that Board holds, constitutes trust monies for the benefit of Man-Shield pursuant to the provisions of s.7(1) of the Act . However, in my view, contrary to the submissions of Man-Shield, the provisions of s.7(3) and (4) do not entitle a contractor to immediate payment of these amounts in circumstances where there is a claim for set off by a statutory trustee, in this case, the Board. The quantum of the trust amount cannot be determined without a determination of the value of the set off claim. In this case, all the provisions of Part II of the Act must be considered. Section 7 cannot be read in isolation when the provisions of section 12 clearly give a trustee a right to set off against monies held in trust (subject to the provisions of Part IV regarding holdback). At this point in the action, the Board no longer has any holdback obligation in respect of any of the sub-trade liens of Man-Shield as these liens have either expired or have been secured by bonds or payments made into Court.
[ 16 ] In considering the effect of Part IV on the right of a trustee to set off against an amount held in trust, I am persuaded by the logic articulated in the Galholt text. As long as there is an obligation by a trustee to retain holdback, there can be no set off against those amounts. However once those amounts lose their quality of being considered statutory holdback, the right, or possibility of, set off exists despite the fact that these monies are still trust funds under the Act . Section 7 and Section 12 have to be considered together in a situation where an owner asserts a set off claim against trust monies. These sections provide that absent a holdback obligation, the right and quantum of a set off is an issue to be determined between the parties at a trial. Man-Shield argues that holdback amounts are inviolable regardless of the set off claim of the owner. However, in my view, the inviolate nature ends when the amounts being held back are no longer needed because the liens for which they are designed to benefit have expired, been satisfied or at least protected by other means. Holdback is maintained for the benefit of those lower on the lien tree. If the lien rights of those lower on the tree change, the obligation on those higher on the lien tree changes as well.
[ 17 ] In a similar way, trust funds cease to be capable of being additionally characterized as holdback when the lien rights of any person claiming against the contractor expire as provided in Part V of the Act , or the lien rights have been satisfied, discharged or provided for under s.44 of the Act (payment into court). This statutory language which defines when holdback funds cease to be treated as such under the Act appears in s.22 and in s. 30 .
[ 18 ] In this case, Man-Shield’s lien remains on title to the School. The validity and quantum of the Man-Shield lien are still triable issues in its lien action. The quantum of Man-Shield’s trust claim and whether the Board has breached the statutory trust provisions of Part II of the Act are still triable issues. The mere fact that counsel asserts that the majority of the value of Man-Shield’s lien is earmarked to satisfy its holdback obligation does not change the nature of the funds while in the hands of the Board..
[ 19 ] Man-Shield’s lien, in and of itself, puts the Board on notice of its claim and creates the possibility that if the Board distributes funds other than to Man-Shield that were designated to be spent on the Project, they may have to pay these funds twice. The quantum and the validity of the lien are triable issues. It is also important to note that s. 17(3) of the Act clearly identifies that, subject to the holdback obligation, a payor is entitled to set off amounts owing by it to the person the payor is liable to pay. The quantum of the Man-Shield lien may in fact include amounts it in turn owes to its subcontractors and may even include amounts Man-Shield is obliged to hold back for the sub-trades of those with which it has direct contracts. This reality does not change or create additional obligations on the part of the owner, in this case the Board. The holdback obligation of the Board is in respect of those who do not have privity of contract with the Board but have direct contracts with Man-Shield and who have provided construction goods and services to the project at issue. When the lien rights of those subcontractors expire, or have been otherwise satisfied, the holdback obligation of the Board expires as well.
[ 20 ] In this case it means that characterization of the funds held by the Board may change during the course of the proceedings. If the argument of Manshield was accepted, it would mean that any statutory holdback amount would be payable immediately in circumstances where there are no monies owing to any sub trades, simply because one of the parties characterizes funds as “holdback”. This argument ignores the other provisions of the Act that permit an owner to challenge lien claims as the result of disputes over the value of the work performed, delay or deficiencies in the work, all of which can form the basis of a legitimate set off claim. The legislature has clearly contemplated the possibility of a set off against monies owing both under the trust provisions of the act in Part II and the lien section contained in Part III.
[ 21 ] In my view, there is a triable issue in this matter as to whether or not the owner has a legitimate right of set off against the trust funds and indeed the quantum of Man-Shield’s trust claim. Also, although it appears the trust funds held by the Board no longer have the quality of being considered holdback as all liens of any of those claiming under the Man-Shield lien have expired, that issue may require a trial to resolve. However there is no basis for an order for immediate payment based on the material presented in this motion.
[ 22 ] I am also mindful of the recent decision of the Court of Appeal in Combined Air . In this case I do not believe there is a sufficiently clear legal basis for Man-Shield to assert its claim for immediate payment, let alone following a consideration of the evidence as it has been presented on this motion. In my view, lacking a legal basis for immediate payment, the fact of the dispute between the parties raised by the Board’s claim for set off means that a motion for partial summary judgment at this stage in the litigation does not represent an appropriate means for effecting a fair and just resolution of the dispute before the Court
[ 23 ] Accordingly the Man-Shield motion for partial summary judgment is hereby dismissed. Parties may make written submissions as to costs within 15 days of receipt of these reasons.
The Hon. Mr. Justice F.B. Fitzpatrick
Released: January 13, 2012
COURT FILE NO.: CV-11-0258
DATE: 2012-01-13
ONTARIO SUPERIOR COURT OF JUSTICE IN THE MATTER OF THE CONSTRUCTION LIEN ACT, R.S.O. 1990, c. C.30 B E T W E E N: MAN-SHIELD (NWO) CONSTRUCTION INC. Plaintiff - and – RAINY RIVER DISTRICT SCHOOL BOARD Defendant DECISION ON MOTION Fitzpatrick J.
Released: January 13, 2012
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