Court File and Parties

COURT FILE NO.: 14-59786 DATE: 2019/07/17 COURT OF ONTARIO, SUPERIOR COURT OF JUSTICE

In the matter of the Construction Act., RSO 1990, c. C.30, as amended

RE: ROD THOMPSON, AS TRUSTEE OF THE LOCAL 93 CARPENTERS & FLOOR LAYERS AND THE OTTAWA CONSTRUCTION LABOUR RELATIONS ASSOCIATION TRUST FUNDS, Plaintiff (lien claimant)

AND:

CARLETON UNIVERSITY, LOUIS W. BRAY CONSTRUCTION LIMITED, 1803680 ONTARIO INC., COB AS F & H CONCRETE FORMING, Defendants

BEFORE: Mr. Justice Calum MacLeod

COUNSEL: Michael C. Mazzuca, for the Plaintiff, (Local 93 trust fund) Nadia J. Authier, for the Defendant, (LWB)

HEARD: August 15-17, 2014, January 21, 22, 2019, submissions in writing

REASONS FOR DECISION

[1] This is the trial of an issue in a construction lien proceeding. The issue is the holdback liability of Louis W. Bray Construction Limited (LWB) concerning its sub-contract with 1803680 Ontario Inc. (“F & H”). LWB was the general contractor for the construction of a parking facility straddling the O-Train line at Carleton University. F & H was its main sub-contractor and the lien in question was registered by the union trust fund on behalf of carpenters, members of Local 93, who were employed by F & H.

[2] F & H appears to be insolvent and did not actively defend or participate in the proceeding although Mr. Moniz, its principal was a witness. Carleton University has no liability and has been released from the action. The sole question at the moment is the extent of the general contractor’s holdback liability. This is a very focused question which depends on the value of the work performed under the F & H sub-contract at the time the lien was filed.

[3] As I will describe, the parties have diametrically opposed positions. Local 93 contends there is $165,000.00 owing to the union trust fund pursuant to liens it registered in 2013 when F & H was unable to pay. It is the position of the union that the basic holdback is $136,401.33. It argues there is a further notice holdback of as much as $620,000.00. If that is correct, LWB should be responsible for payment of the full amount secured by the liens.

[4] It is the position of LWB that the statutory holdback is only $31,500.00 plus HST [1] and that there is no notice holdback in the circumstances of this case. In any event, LWB argues that the liens are invalid so that nothing is owed to the Local 93 trust fund by LWB.

[5] For the reasons that follow, I find that the holdback liability of LWB is $110,827.66. I have yet to rule on the validity of the liens. That question is to be determined by a summary procedure.

Procedural History and the Issue to Be Tried

[6] For purposes of this decision, I need not detail the procedural history of the action. Suffice to say it appears there were two actions started on behalf of Local 93 by two different lawyers. Though there was never a formal consolidation order, the parties appear to have treated them as a single proceeding and to have agreed to a reference under s. 58 of what was then the Construction Lien Act (the Act). [2] It was in this manner that the matter first came before me in my capacity as a master. At the first hearing for directions (November 25, 2014), trust claims were filed by two unions and a claim for super priority by the Canada Revenue Agency. There was also some uncertainty about funds that had been advanced to a law firm that had previously acted for F & H. F & H did not appear although it had been served with the notice of trial.

[7] When the reference started in 2014, a major focus was on whether or not CRA could seize all remaining funds or whether Norex applied. [3] As held in Norex, CRA would have priority over funds owing to F & H but would not have priority over holdback funds which are impressed with a trust for the benefit of sub trades and suppliers at the next level of the construction pyramid. In addition to this issue, the status of F & H was unclear as was the status of funds that had been paid by LWB to lawyers previously acting for F & H.

[8] The situation is now simplified. One of the lien claims, the CRA claim and the funds paid to counsel were resolved during the course of the reference. Local 93 is the only remaining lien claimant and LWB’s only possible liability is for holdback pursuant to Part IV of the Act.

[9] During the reference, under the authority of Rule 55.01 as well as s. 50 (3) of the Act, I had directed the hearing of a focused trial to resolve the issue of holdback. The matter came on for trial on August 15th, 2016 by which time I had been appointed a judge. On consent, the parties agreed to set aside the judgment of reference and proceed as a trial of an issue but all prior directives and determinations made by the referee continued to apply. I directed that LWB would lead evidence first because LWB had the burden of proof to establish that its statutory holdback obligation is less than 10% of the sub-contract price.

[10] In the event, the trial was not concluded in the three days that had been reserved and it had to be adjourned. For various reasons the second part of the trial was not scheduled until January of 2019. Final submissions were made in writing. It is on this basis that I now come to rule on the question of holdback.

The Facts

[11] As mentioned above, the project was owned by Carleton University. It involved building a multi-storey parking structure on either side of the “O-Train” tracks. LWB was the principal contractor. There was also a project manager on behalf of the University (Doran). F & H was the forming sub-contractor. The sub-contract was reduced to writing in the form of CCDC 1. This was a stipulated price contract including material, labour and equipment worth $1.2 million plus HST. Under that sub-contract, F & H was responsible for all of the form work. LWB had a similar contract with Carleton which included the form work sub-contracted to F & H as well as pouring concrete, finishing work and preparation for the installation of pre-fabricated panels. For some reason Carleton remained responsible for supplying the concrete.

[12] It appears from the evidence that when it came time to mobilize forces, F & H was having cash flow difficulties. It is undisputed that in order to permit F & H to start work, LWB agreed to issue purchase orders and to pay suppliers directly. From time to time LWB also made cash advances to F & H. At some point just prior to the registration of liens, LWB was advancing funds in escrow to the law firm of Lister, Beaupre rather than paying F & H directly.

[13] Construction continued during 2013 and ceased sometime in late November 2013 when it became too cold to pour concrete. By that time a significant amount of the work was completed but it seems F & H was out of funds and LWB had ceased paying. Though F & H was called back to work in early 2014, it did not return, and its sub-contract was formally terminated in April of 2014. LWB completed the work and addressed deficiencies which it charged back to F & H.

[14] There is no litigation between F & H and LWB nor any crossclaims in this proceeding. As a consequence, although there were disputes between LWB and F & H about how much was owing under the sub-contract and what was owing for extras, those disputes will not be adjudicated in this proceeding at least not directly. The only issue in this proceeding is whether LWB is liable to the union trust fund. Its maximum liability would be for holdback.

Statutory Holdback

[15] The Act contains various provisions to protect the rights of unpaid parties in construction projects. One of the central features of the legislation is holdback. Section 22 of the Act requires that each payor retain a portion of each payment made under a construction contract for the benefit of the sub-contactors and suppliers at the next level of the pyramid. Those are the people or companies hired by the contracting party with whom the owner or general contractor has no privity of contract.

[16] The first form of holdback is established by s. 22 (1) of the Act and is referred to as “basic holdback”. The subsection has been slightly amended but at the relevant time it read as follows:

22. (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).

[17] This requirement to holdback 10% of the price of services or materials creates personal liability to lien claimants who have valid liens and it cannot be subject to setoff for default or breach of contract by the contracting party to whom the funds would otherwise be due. In this case, for example, LWB was required to holdback 10% of the price of services rendered by F & H and it cannot setoff any claims it may have against F & H against that holdback if there are valid lien claims. It is this inviolate nature of the basic holdback which justifies the fact that the CRA priority does not apply to such holdback.

[18] There is a further provision for holdback in ss. 21 & 24 of the Act. Under those provisions, once a payer under a construction contract receives written notice of a lien, it is required to holdback 100% of the amount of the lien in addition to the 10% basic holdback from any funds due to its sub-contractor. Unlike basic holdback, however, the amount of “notice holdback” can be subject to setoff or other claims against the sub-contractor for deficient or incomplete work pursuant to s. 17 (3). But a payer who continues to advance funds to a sub-contractor after receiving notice of lien may be liable for the notice holdback in addition to the basic holdback.

[19] It is against this statutory background that the obligations of LWB to the Local 93 trust must be determined.

Was the Contract Amended?

[20] LWB’s first argument is that its contract with F & H was amended to a labour only contract. If this is accepted, then the value of the work done by F & H would not include the material or equipment rental and the basic holdback would be only 10% of a greatly reduced amount. Both Gaspare Mangiaracina and Heather Macmillan testified that when FWB agreed to pay the F & H suppliers directly, it was intended that these amounts be deducted from the contract amount and eventually LWB issued change orders purporting to do just that. I find, however, that this is revisionist history. On this point, I accept the evidence of Mr. Moniz that the amounts were to be deducted from his payments and not from his contract.

[21] There are several reasons for reaching this conclusion. Firstly, there was never a formal change to the CCDC 1 contract to convert it to a labour only contract. It remained a stipulated price sub-contract in which LWB had the benefit of a fixed price. The minutes of the first site meeting at which LWB agreed to issue purchase orders and pay suppliers are clear that those amounts would be deducted from progress payments. There is no mention of amending the contract price.

[22] This is precisely how the contract was administered. On each of the progress draws, F & H’s draws were calculated on the percentage of the contract that was completed. The payments to suppliers were deducted in the same manner as cash advances to F & H. LWB continued to treat this as a stipulated price contract in which F & H bore the risk of any cost overruns for equipment or supplies. F & H was paid for the value of the contract minus the advances. There was no separate calculation of labour costs.

[23] Tellingly, LWB calculated its holdback obligation on the full value of the progress draw and held that amount back from the payment to F & H. In other words, F & H was charged with 10% of the value of the contract and not just 10% of that value net of the payments to suppliers. LWB did not hold back from the supplier invoices. It held the amounts back from the funds due to F & H inclusive of those costs. LWB at all times acted as if F & H would be held to the original stipulated price.

[24] It was only after the liens were registered that LWB belatedly attempted to issue change orders reducing the value of the contract. Though Mr. Moniz signed some of those change orders, he testified that he did so without reading them and under financial duress. In any event those change orders were signed after the fact and do not reflect how the contract had been administered until that point in time. I agree with the submissions of Local 93 that the contract was not amended. The contractual price inclusive of labour, materials and equipment remained a stipulated or fixed price contract. The direct payments were simply deducted from F & H’s payments when the progress payments were processed. In other words, these payments were treated as credits towards the amounts otherwise due under the contract.

[25] The site minutes, the lack of contemporaneous change orders, the certificates of payment and the evidence at the trial all support this conclusion. It was not until F & H’s position became clearly untenable and the union had registered two liens that LWB belatedly attempted a retroactive amendment in the form of change orders.

[26] I recognize that the reality in management of construction contracts often requires the parties to complete work before change orders are finalized. Retroactive adjustments to scope or price are not uncommon. This is particularly the case where, as here, LWB had also to obtain its own progress payments and had to negotiate with Doran and Carleton. Here, however, the question is not so much what rights existed between LWB and F & H but what liability LWB had to subtrades, suppliers and workers with whom it has no privity of contract. The statutory scheme provides protection for those further down the construction pyramid. Even if F & H agreed to an amendment after the liens had been registered, a contractor and sub-contractor cannot collude to reduce the holdback liability after the fact. This is particularly the case with a worker’s lien protected under the provisions of s. 81 (3) of the Act.

[27] Rather than amending the contract to a labour only contract, LWB and F & H decided to continue with the original contract and to provide credits against progress draws. LWB cannot artificially reduce its statutory holdback by seeking to amend the contract after the lien rights have arisen. LWB’s own document show that as of September 30th, 2013 LWB had retained statutory holdback of $85,640.00. The progress draw prepared in December shows a statutory holdback of $110,827.66 even after deducting certain of the proposed change orders from the value of the contract.

[28] I note that LWB continued to issue change orders throughout 2014 long after the F & H contract had been terminated. It ultimately purported to reduce the contract value to almost zero and to owe nothing to F & H. Those change orders include chargebacks, were unilateral and are not helpful on the question of the statutory holdback subject to lien rights.

The Value of the Completed Work

[29] LWB also tries to argue that the value of the work completed by F & H at the time the lien rights arose was lower than its own records indicate. In essence it argues for “over certification”. Over certification occurs when a payment certifier makes a mistake about how much work has been done and because that is a possibility, the progress certificates normally contain reservations of rights. I accept that parties are not bound by the payment certification made at the time of progress payments but there will be a significant onus on a party wishing to show that the certificate is in error.

[30] In this case there is no question of fraud or misrepresentation. The progress certificates represent LWB’s own assessment of completion of work and are not based on documents submitted by F & H. The evidence discloses that F & H never provided requests for payment or submitted invoices. It was known from the outset that Mr. Moniz was not good with paperwork and was not a reliable record keeper. In addition, during the time in question he was working 18 hour days just to get the job done.

[31] LWB certified payments based on its own calculations of the “value of the work finished to date”. Those calculations show the value of the work as a percentage of the $1.2 million sub-contract. At the end of September, LWB calculated the value of F & H’s work at $847,640.00 (and it retained a holdback of $85,764.00 accordingly). This did not include extras or change orders. The December certificate for payment showed the value of the work completed as $1,108,276.60. This was after adding extras of $79,276.60 and also purporting to reduce the contract value by $339,439.75.

[32] Payment certifications are important documents. This is the best evidence of the value of the work completed under the contract at the time in question. The evidence is that LWB’s estimate of the value of the work was derived from its own assessment and the assessment of the project manager, Doran. The Certificate for payment in December was unsigned but Mr. Mangiaracina did not repudiate it. Ms. Macmillan thought there would have been a signed copy. It is her writing on the document adding in a value for extras.

[33] The December progress certificate is significant because it shows that the F & H contract was 92% complete even after deducting $339,439.75 in “change orders”. This is consistent with the evidence of Mr. Moniz and Patrick Bourgon, one of the workers, who estimated that the work was 95% complete at the end of November, 2013 when they said LWB ceased work for the winter. Apart from the work removed from the contract and given to another forming company, F & H’s evidence was that the main work remaining to be completed under the contract was the construction of a stairwell and a section of the wall that had been left open to permit access to the site.

[34] The F & H contract was a sub-contract to LWB’s contract with Carleton and of course LWB would have been involved in a similar process of progress payments on its own contract which included F & H’s work on forming and then LWB’s work in placing and finishing the concrete. Doran’s “statement of project progress” dated January 10, 2014 indicated that the LWB contract was 83.4% complete as of December 31, 2013. While that is less than the 92% in LWB’s certification for payment of the sub-contract, this does not necessarily imply an error in the latter.

[35] It would not necessarily be expected that the LWB contract and F & H sub-contract would be in lockstep. Forming has to be done before concrete pouring and finishing work so it is certainly possible that on any given date, F & H’s work could be more complete than the entire LWB contract. Even though at the end of the construction season, one might have expected the assessment of progress under the main contract and the sub-contract to be similar, the statement of progress by Doran in its dealings with LWB does not by itself prove that LWB’s assessment of progress by F & H was incorrect.

[36] The deduction of $339,439.75 from the value of the contract in the December certificate has not been adequately explained but in change order 13 issued almost a year later there is paperwork to show that the LWB contract was reduced by $147,298.00 because Doran had brought in Belai Brothers to do some of the work on the west side. This represented a reduction in scope to the LWB contract and to the F & H sub-contract. Mr. Moniz acknowledged that reduction in scope when he was examined in chief at the trial but he felt that no more than 80% of the reduction in the scope of the prime contract should have been reflected in the sub-contract. Nevertheless, there were some legitimate reductions in the scope of the sub-contract quite apart from the work that was left to perform and the correction of deficiencies. The key thing however is that LWB itself valued the work that was completed at $1,108,276.60 and calculated the holdback liability accordingly. This is the best available evidence of the value of the work when F & H went off the job and the union registered its liens.

[37] I am not persuaded there was over certification. No witness was produced to explain the correct calculation or to confess to any error. Most of the evidence I heard from LWB had to do with deficiencies and repairs.

[38] Apart from the argument about erroneous over certification and recognizing that setoff is not available against basic holdback, LWB nevertheless attempts to argue that the cost of remedying and completing the work should be considered in assessing the value. This is a different over certification argument. LWB may have believed that work was completed at the time of certification in December but if some of that work proved to be defective it might have to be redone. Arguably this would reduce the value of the work.

[39] In Urbacon Building Groups Corp. v. Guelph (City) [4] this possibility was recognized. The cost of completion including costs, if any, to remove and rectify defective work can be considered in determining the value of the work completed. This does not mean that these costs can simply be deducted from the value of the work because doing so would permit indirectly what s. 30 of the Act specifically prohibits. If it is necessary to replace a sub-contractor before the work is completed, it may well be more expensive to bring in other sub-trades or for the contractor to use its own forces. The cost of completion or of rectifying deficiencies that the original trade would have repaired are legitimate claims against the original sub-contractor but they do not automatically demonstrate that the estimate of value in the progress certificate is in error and they cannot be set off against the 10% basic holdback.

[40] There were some significant deficiencies in the work. In particular there were walls which encroached on the railway right of way and there were walls which were not plumb. In fairness, it is not completely clear that these deficiencies were the fault of F & H. There were also deficiencies in the work done by LWB and by Bellai Bros. some of which have been attributed to pressure by Carleton and Doran to accelerate the work. Accepting that these were deficiencies F & H would have been responsible for rectifying or paying for, they were not deficiencies that were undiscovered or unknown at the time of the December payment certification. They were known. Perhaps what was not known was precisely what remedial measures and what cost Carleton and Doran might ultimately accept.

[41] Having regard to all of the evidence, I continue to regard the LWB certificates as the best evidence of the value of the services provided by F & H to the end of 2013. I find that there is no injustice in holding LWB to its own calculation of holdback. At the date the liens were registered, LWB had held back $110,827.66 which is 10% of the value of the services rendered by F & H inclusive of labour, materials and equipment rental as calculated by LWB at that time. This is consistent with the manner in which the previous progress payments and holdback had been calculated.

Notice Holdback

[42] As discussed above, notice holdback attaches to any funds due to the sub-contractor at the date the lien was registered. Local 93 wishes to argue that any payments made by LWB to suppliers after the liens were registered are payments that were improperly made out of the contract monies because they ignore the priority to be given to workers’ liens.

[43] This sounds more like a breach of trust argument under the trust provisions of the Act and pursuant to s. 50 (2) of the Act, a trust claim may not be combined with a lien claim. I understand the logic that the stipulated price contract remained in effect and payments to the suppliers were treated as advances to F & H. While it is true that such payments were treated as deductions from F & H’s entitlement to payment under the contract, however, the suppliers themselves were not bound by the arrangements between LWB and F & H. Those suppliers had a direct contract with LWB because they were supplying material needed by F & H to fulfill its contract under purchase order issued by LWB. Although I have found that the F & H contract remained intact for purposes of calculating basic holdback, it does not follow that paying supplier invoices was diversion of funds owing to F & H.

[44] It is not necessary for me to decide this question because whatever may have been owing to F & H at the time notice of the liens was received was subject to setoff against the costs of completion and remedial work. Mr. Moniz disputes some of the chargebacks but his opinion that he was overcharged for remedial work or undercompensated for extras has very little weight. F & H has no records that can assist in this matter and the union is in no position to dispute the costs actually incurred by LWB. Indeed, LWB has produced its own change orders demonstrating chargebacks and costs inflicted on it by Doran and Carleton. In my view the evidence readily demonstrates that LWB incurred completion costs and remedial costs which exceeded any amount it might have owed to F & H.

[45] As a result, I find that there is no notice holdback.

Timeliness and Quantum of the Lien

[46] I was surprized to hear from LWB at the opening of trial that it was challenging the timeliness and quantum of the lien. This is for a number of reasons. I accept however that LWB pleaded this defence, has never formally abandoned it and has not admitted the validity of the liens. I permitted LWB to reserve its rights and indicated that I would deal with this question after I had ruled on holdback if it is necessary to do so. I will hear further from counsel as to how they wish to proceed but it is necessary to make a few observations.

[47] Firstly, in the endorsement following the hearing for directions in November of 2014, the issues of timeliness and quantum of the lien claim were not listed as issues to be adjudicated. Counsel had been directed to advise the court if there were other live issues that had not been listed. The intent of the referee was, as required by the Act and the reference rules, to narrow and define the issues for trial.

[48] There was a request from LWB for time sheets and other supporting documents to support the quantum and timeliness of the union lien claims. As referee, I had assumed that after vetting those documents the defendant would be satisfied or there would be negotiation on the amount provable by the union. The union did provide affidavits from workers in which at least three of those workers depose that their last day on the project was November 22, 2013. During the trial, Mr. Bourgon testified that there were about 20 workers still on the job in November but not getting paid.

[49] As I understand it, liens were registered by Local 93 (Carpenters) for $90,000.00 and by Local 527 (Labourers) for $15,000 on November 13, 2013. The Labourers lien was subsequently resolved. Local 93 registered another lien for $170,000 on December 20, 2013. I had understood that all of these liens were registered within 45 days of the date when the last member of the local would have been on the site.

[50] By September of 2015, CRA had agreed to abandon its claim. This is because CRA was satisfied that LWB would not have owed any funds directly to F & H. As had been discussed on the original hearing date, if LWB’s only liability would be for holdback, the CRA priority would not apply to the holdback funds under the ratio in Norex.

[51] During the reference, I directed LWB to calculate what it admitted to be the minimum basic holdback and subsequently I ordered that amount paid out to the Local 93 trust. While LWB objected to that order, it was made on the assumption that there was no genuine issue about the validity of the liens. It appeared that the issue had been narrowed to whether or not LWB owed more than the minimum admitted statutory holdback or whether its obligation was fully satisfied by payment of the $31,500.00 + HST. [5]

[52] The narrow focus of the trial of an issue was justified because a finding that there was no further holdback liability would mean that LWB would owe nothing more to the union trust fund. It cannot be forced to pay more than its maximum holdback obligation.

[53] On August 15th, 2016 the trial was scheduled to proceed. It was then, for the first time since the 2014 hearing for directions that I was advised LWB did not accept the timeliness or quantum of the lien and would require that it be proven. If the lien is invalid then not only would LWB not owe anything more, it could ask the Local 93 trust to reimburse the funds already paid pursuant to my interim order.

[54] I directed that the trial of the quantum of holdback would continue as a trial of an issue as planned but because the issues of timeliness and quantum had apparently neither been abandoned nor admitted, those issues would be deferred to be proven “by means of a different process should that be necessary”. I indicated that further direction would be given following the trial of the issue.

[55] It was the clear intention of this order that the only issue to be tried was the value of the statutory holdback. I was not requiring Local 93 to prove its lien during the trial. Accordingly, this ruling is final as to the amount of the holdback, but I have not yet ruled on the validity of the liens.

[56] There are also judgments against F & H made by the OLRB and registered in this court. There may be a question as to how the OLRB judgment relates to this proceeding.

[57] I invite counsel to discuss these matters and then to contact my office. I will then provide direction regarding the next steps, any other issues to be decided and the question of costs.

Mr. Justice C. MacLeod Date: July 17, 2019

Footnotes

[1] This amount has already been paid pursuant to an interim court order.

[2] Now the Construction Act., RSO 1990, c. C.30, as amended

[3] PCL Constructors West Coast Inc. v. Norex Civil Contractors Inc, 2009 BCSC 95 which deals with conflicting priorities in relation to holdback.

[4] (2009) 91 CLR (3d) 145 (Ont. SCJ)

[5] And some or all of the sum of $18,500.00 received from the law firm of Lister, Beaupré.