COURT FILE NO.: CV-20-638236
DATE: May 12, 2022
SUPERIOR COURT OF JUSTICE – ONTARIO
In the Matter of the Construction Act, R.S.O. 1990, c. C.30, as amended
RE: Ozz Electric Inc. v. Bondfield Construction Company Limited, Unity Health Toronto formerly known as Providence St. Joseph’s and St. Michael’s Healthcare, 2442931 Ontario Inc. and the Sisters of St. Joseph for the Diocese of Toronto, in Upper Canada;
BEFORE: ASSOCIATE JUSTICE C. WIEBE;
COUNSEL: James MacLellan and Brian Kolenda for Zurich Insurance Company Ltd. (“Zurich”);
Ryan Hauk for Ozz Electric Inc. (“Ozz”);
Andrew Kalamut for Unity Health Toronto formerly known as Providence St. Joseph’s and St. Michael’s Healthcare (“SMH”);
Aryo Shalviri for Alvarez & Marshal Canada Inc., Receiver for 2442931 Ontario Inc. (“the Receiver”);
Alan Merskey for Ernst & Young in its capacity as Court-appointed Monitor for Bondfield Construction Company Limited (“the Monitor”);
Harvey Chaiton for the Bank of Montreal (“BMO”);
Fernando Souza and Emilio Bisceglia for Urban Mechanical Contracting Inc. (“UMC”) and Oakdale Drywall & Acoustics Ltd. (“Oakdale Drywall”);
Sandra Astolfo for NORR Limited (“NORR”);
Adam Wainstock for Safway Services Canada, Inc. (“Safway”);
Howard Borlack for MMM Group Limited/WSP Canada Group Limited (“WSP”);
Albert Engel for Priestly Demolition Inc. (“Priestly”);
William Ribeiro for Triumph Aluminium and Sheet Metal Inc. (“Triumph”);
Jeramie Gallichan for Honeywell Limited (“Honeywell”).
HEARD: April 21, 2022.
REASONS FOR DECISION
[1] At the trial management conference on January 7, 2022, Zurich indicated that it wished to intervene in the lien proceedings for the purpose of having the remaining liens in this reference, particularly the liens that seek to share the agreed upon holdback under the Bondfield contract (“the Timely Claimants”), vetted by a vetting committee that included Zurich. Given the apparent work that had already been done to come to an agreement amongst the Timely Claimants, SMH, the Monitor, the Receiver and BMO over the last year as to the quantum of that holdback and its distribution, I decided to schedule a motion by Zurich for leave under the old Construction Act, R.S.O. 1990, c. C.30 (“CA”) section 67(2) to move to intervene and establish such a vetting committee. It is undisputed that the old CA as it read before July 1. 2018 applies to this reference.
[2] When Zurich brought this motion it rightfully pointed out that the intervention issue was not subject to a section 67(2) leave requirement as CA section 57(2) expressly authorizes the court to add or join any person to a lien action at any time subject only to section 54, the section concerning defences and noting in default. In Yong Tai Construction Limited v. Unimac Group Ltd. et al., (February 12, 2016) Toronto CV-13-113944 at paragraph 13 I concluded that a motion to join or add a party to a lien action did not require section 67(2) leave given section 57(2). However, I note that section 67(2) leave would be required to strike a vetting committee.
[3] In its motion Zurich is careful only to seek an order granting it leave to be added as a party to the lien proceedings in this reference under section 57(2). It did not seek an order establishing a vetting committee. I note that the motion seeks in the alternative leave under section 67(2) to move under Rule 13.01 for leave to intervene as a party under that rule. As I noted in Yong Tai, the court must be guided by section 57(2) on issues of joinder of parties to lien actions, and not Rule 13.01. However, also as I noted in Yong Tai, the court can be guided by the provisions of Rule 13.01.
Background
[4] First some background facts that are not in dispute.
[5] Bondfield Construction Company Limited (“Bondfield”) succeeded in getting the bid for the construction of a patient care tower at SMH in downtown Toronto. The project was a P3 “design-build-finance” project. In 2015 Bondfield created a special purpose corporation, 244391 Ontario Inc. (“244”), which contracted with SMH to do the entire project. 244 in turn contracted with Bondfield for the construction work. 244 obtained the financing from a group headed by the Bank of Montreal (“BMO”). As required, Bondfield’s bonding company, Zurich, issued two bonds naming 244 and SMH as obligees: a performance bond guaranteeing that the work would be done in accordance with the contract; and a labour and material payment bond guaranteeing payment to Bondfield’s trades and suppliers for their work on the project.
[6] In 2018 Bondfield ran into financial difficulty and stopped paying trades. Numerous claims for lien were registered. Emco Corporation obtained a judgment of reference. I became seized of the reference at the first trial management conference on August 1, 2018. Zurich appeared and advised that it was resolving the lien claims. I adjourned the trial management conference several times to facilitate this process.
[7] Pursuant to its performance bond obligations, Zurich arranged with trades for payment in return for continued work. These arrangements were called “ratification agreements.” Zurich says that with the two most important trades - the electrical trade, Ozz, and the mechanical trade, UMC – the ratification agreements contained advances of holdbacks for these trades.
[8] On April 3, 2019 Bondfield obtained an order under the Companies Creditors’ Arrangements Act (“CCAA”) giving it protection from its creditors. This order stayed this reference. I suspended the reference on August 1, 2019.
[9] On December 20, 2019 there was an order terminating the involvement of Bondfield and Zurich on the project. SMH took over. It is undisputed that this order triggered the 45 day lien period under the old CA. The lien claims that were not resolved by Zurich and that were registered by the end of the 45 day lien period were those of Ozz, UMC, Safway, WSP, NORR, Priestly and Lab Flooring Industries Inc. (“Lab”). These are the Timely Claimants. The lien claims of Triumph, Honeywell, Class I Incorporated (“Class I”), Oakdale Drywall and 821120 Ontario Inc. (“821”) were not registered within the lien period. Several of these trades also made claims on the Zurich payment bond and commenced actions to further those claims.
[10] On February 4, 2020 Zurich commenced an action against SMH, Project Co., Bondfield and others seeking a rescission of the payment bond on the grounds of alleged fraudulent activity during the tendering process for the project. Payment bond claimants brought an application seeking a declaration that Zurich could not obtain such relief. The application was dismissed, but there is a pending appeal of the dismissal order.
[11] From March, 2021 Ozz led discussions amongst the Timely Claimants, SMH, Receiver, Monitor and BMO with a view to resolving the owner’s holdback obligation under the Bondfield contract and the distribution of same to the Timely Claimants. These discussions resulted in an agreement between the Timely Claimants as to the distribution of the holdback. As a result, Ozz sought a trial management conference with me which took place on October 27, 2021. With the consent of the Monitor, I lifted the suspension on this reference. I was told that the parties to the discussions had resolved all lien issues concerning the Timely Claimants. I ordered that SMH confirm the holdback amount and made other orders. At the next trial management conference on January 7, 2022 I was advised that the Timely Claimants, SMH, Receiver, Monitor and BMO had agreed that the holdback is $23,865,600 (HST inclusive). At Zurich request, I scheduled this motion. Zurich does not challenge the holdback quantum.
Interest in the subject matter
[12] In Yon Tai I stated that that, while I am not bound by Rule 13.01(1) given the breadth of old CA section 57(2), I can and should take guidance from that rule. Using the same reasoning, I paid considerable attention in this motion to the issue of whether Zurich “has an interest in the subject matter of the proceeding.”
[13] The subject matter of this proceeding is the agreed upon SMH holdback for the Bondfield contract. Having reviewed the evidence and read and heard the submissions, I have concluded that there is a real triable issue as to whether Zurich has a direct interest in that holdback.
[14] Zurich claims that it advanced holdback to Ozz and UMC. Concerning Ozz, Zurich’s motion record contains an affidavit of Adrian Braganza, a senior claims professional at Zurich. Mr. Braganza deposed that after Bondfield’s default in 2018, Zurich retained a consultant, VTX Consulting Services (“VTX”), to clarify the trade accounting and facilitate the ratification agreements. The affidavit shows that, due to a mistaken double accounting of HST, Zurich overpaid Ozz on its existing accounts by $4,056,057.42. When this came to light after the ratification agreement was signed, according to Mr. Braganza, Zurich and Ozz agreed to treat this overpayment as a holdback advance. In fact, Mr. Braganza deposes that Ozz agreed to provide Zurich with a Release of Holdback Bond. The Braganza affidavit attaches an email from a VTX person to Ozz personnel sent two months after the ratification agreement confirming the HST mistake and the alleged agreement to treat the overpayment as a holdback advance.
[15] Ozz denies this agreement. Indeed, it is undisputed that Ozz never provided the Release of Holdback Bond. However, I note that Ozz’s responding motion contains an affidavit sworn by Christian Masci, an Ozz official, that does not expressly deny the payment of the $4,056,057.42. It simply states that there were continued settlement discussions after the ratification agreement.
[16] In oral argument, I advised Mr. MacLellan that this Zurich claim to an interest in the holdback was tenuous at best as the advance appeared to be nothing more than an unsecured loan. He then showed me that the ratification agreement contains a “partial assignment” of all present and future “claims, rights and causes of action” under the Ozz subcontract to Zurich “to the extent of any payments made by the Surety to, or for the benefit of, [Ozz] . . .”
[17] This showed me that Zurich may have protected itself by taking an assignment of Ozz’s rights to the holdback at least to the extent of the Zurich holdback advance. Zurich may therefore have a claim to a first charge on whatever portion of the holdback is paid to Ozz. If Ozz did not protect this holdback liability to Zurich by expanding its lien accordingly, the argument will be that this was Ozz’s oversight.
[18] The Timely Claimants referred me to another clause in the ratification agreement that required the release of all liens. But I do not find this clause relevant as it pertains to the release of then existing claims for lien, not lien rights on holdback not yet due and payable.
[19] The evidence concerning the UMC holdback release was not as nuanced. Here Mr. Braganza showed that UMC and Zurich agreed expressly in the UMC ratification agreement to holdback advances to be released at specified intervals. The holdback advanced in accordance with this agreement was $2,424,404.14. The UMC ratification agreement contains the same partial assignment clause that exists in the Ozz ratification agreement. There was no evidence from UMC in this motion contradicting this evidence from Zurich. Again, if UMC did not protect this holdback liability to Zurich by expanding its lien accordingly, the argument will be that this was UMC’s oversight.
[20] These Zurich holdback advances appear to total $6,480,461.56, a significant amount of money. That is just over 27% of the agreed upon Bondfield holdback. The Zurich factum contains a chart that shows in detail the proposed distribution of the holdback. The chart shows that Ozz and UMC will together get $19,576,951.68 of the holdback. This represents between 38% and 42% of their claims. The alleged Zurich holdback advances represent 33% of that amount, namely a significant reduction. The advances would also make Zurich potentially the third largest participant in the distribution.
[21] There was much argument about Zurich’s complaints against the proposed distribution not being credible as they arise from a concern about reducing Zurich future liability on its payment bond which it is seeking to rescind in a separate proceeding. I resonate to those arguments. However, those arguments do not, in my view, apply to this issue. The Zurich holdback advances appear to be hard money Zurich has already lost and wants to get back.
[22] As a result, I grant the motion for this reason alone.
Adversely affected
[23] Another ground for allowing an intervention under Rule 13.01(1) is whether Zurich would be adversely affected by a judgment in this action. In Finlayson v. Gmac Leaseco Limited, 2007 CanLII 4317 (ON SC) at paragraph 29 Justice Quinn defined this test as being whether any judgment in the proceeding will finally dispose of an issue to the detriment of the proposed intervenor.
[24] As alluded to above, in addition to the holdback advance issue discussed above, Zurich argued that it would be adversely affected if it is not allowed to intervene by virtue of a potential misallocation of the holdback in the proposed distribution. The argument was that if any one or more of the Timely Claimants are overpaid, the corresponding shortfall in the claims of other Timely Claimants would have to be potentially assumed by Zurich under its payment bond as the payment bond would be the first recourse of the underpaid parties, not the overpaid party. This argument on the surface makes sense.
[25] Mr. MacLellan showed me the above noted chart again. There is indeed a significant discrepancy between a pro rata distribution of holdback based solely on the claims of the Timely Claimants and the proposed distribution in this case. All of the Timely Claimants other than Ozz and UMC – NORR, WSP, Safway, Lab and Priestly – will be getting significantly more in this distribution than they would from a pro rata distribution based on their claims. Only Ozz and UMC will be getting less. This is indeed curious.
[26] However, I have already alluded to my initial response to this argument. It does not seem credible for Zurich to be so concerned about its payment bond liability when it is taking steps in the rescission action to walk away from that liability in any event.
[27] But there is a more concrete reason to reject this argument. I asked several times whether there was any evidence of a real risk that any of the Timely Claimants would be overpaid by the proposed distribution. The Zurich chart shows that the “lesser” lien claimants – NORR, WSP, Safway, Lab and Priestly – will be getting a total of $4,288,648.32 in the proposed distribution. This represents between 78% and 79% of their claims. A 21% to 22% shortfall is not insignificant. Furthermore, as stated above, the big shortfalls will be those of Ozz and UMC, who together will be taking $19,576,951.68 in the proposed distribution. These two will only be getting between 38% and 42% of their claims, meaning shortfalls of between 58% and 62%, which are significant shortfalls. These numbers suggest to me that the risk of overpayment is not great, particularly since the Timely Claimants say that they conducted a thorough review of the lienability and quantum of their claims in their 2021 vetting process.
[28] I do not find that this factor weighs in favour of the motion.
Delay or prejudice
[29] As the Timely Claimants pointed out, allowing Zurich to intervene will lead to some form of a vetting committee. This will delay the distribution of the holdback, a holdback that may amount to the only source of funds for the Timely Claimants given the Zurich effort to get its payment bond rescinded. The Timely Claimants have waited 2.5 years to get the holdback. It is undisputed that Bondfield itself is insolvent.
[30] My finding concerning Zurich’s potential direct stake in the holdback informs my analysis on this point. Given this potential stake, a potential stake the big Timely Claimants, Ozz and UMC, should have known, the question occurred to me as to whether any effort was made to involve Zurich in the vetting process that took place in 2021. The evidence on this point was sparse. In his affidavit, Mr. Masci refers to hearsay evidence from Mr. Tamblyn asserting that he involved Zurich in the discussions. There was no evidence as to what this involvement was. Mr. MacLellan acknowledged in argument that Zurich was contacted in the summer of 2021. I draw the inference that Zurich was at best not seriously involved in this process. That is why it is moving now.
[31] As a result, I find that the 2021 vetting efforts were flawed. There was another course of action available to the lien claimants that they did not take. By the end of 2020, the lien claims were, I believe, all registered. The lien claimants could at that point have revived this reference, after serving notice on Zurich, SMH, the Monitor and the Receiver, and moved for an order from me setting up a vetting committee that included the big Timely Claimants, Zurich and SMH. I could have formally joined Zurich at that point. This course of action could have taken place over a year ago. Had that been done, there is a good chance the vetting process would be done now and would not be in dispute. While there will now be a delay due to the intervention of Zurich, the Timely Claimants do not appear to be blameless for that delay.
[32] I will try to institute a process that will streamline the vetting as much as possible. For instance, I will consider any process that will draw on the vetting work done by the Timely Claimants to date.
[33] There is another point to be made here. Getting Zurich involved in the vetting process could streamline the payment bond actions in the event Zurich does not succeed in getting the payment bond rescinded. This is an added benefit for all extant lien claimants, not just the Timely Claimants.
[34] The Timely Claimants argued that Zurich will be an “adversary” in any vetting committee and cause further delay. I do not accept that argument. All participants in vetting committees are adversaries to some degree. Under the guidance of the court, this process can nevertheless move forward with all deliberate speed.
[35] There was an argument that the vetting committee will result in legal fees being incurred that will be charged against the holdback. Mr. MacLellan assured the parties that Zurich will not do so.
[36] Mr. Souza showed that Zurich’s defence in the UMC payment bond action included a claim seeking a claw-back of its payments to UMC. He argued that this was inconsistent with Zurich’s position on the intervenor motion, which relies on these payments. Mr. Kolenda responded stating that Zurich had evidence of the complicity of Ozz and UMC in Bondfield’s alleged fraudulent actions, and that that was the reason for its position in the payment bond actions. I will not comment on those issues other than to say that I do not see the inconsistency Mr. Souza alleges.
Conclusion
[37] I, therefore, grant the motion and allow Zurich to be a party to this action and reference. The immediate purpose of this joinder is to have the lien claims vetted as quickly as possible with a view to reaching a consensus on the distribution of the agreed upon holdback. Should such a consensus be reached, I do not see any need for further activity in this reference given the CCAA order, the stay concerning Bondfield, Bondfield’s general insolvency and the fact that none of the payment bond actions have been referred to me.
[38] The nature of Zurich’s position in this action and reference will be clarified at the next trial management conference. In this regard I suspect that Zurich may be wearing “two hats”: as a potential lien claimant with assigned lien rights at least concerning the Ozz and UMC lien claims; and as a defender of Bondfield’s position in the lien actions. I note that the latter position has been found to be a basis for allowing sureties to intervene in lien actions where the sureties have lien bonds in court and its principals are insolvent; see Royal Windsor Mechanical Inc. v. Toronto Catholic District School Board, 2010 ONSC 1849 at paragraph 61 and Wabco Standard Trane Inc. (c.o.b. Trane Canada) v. Inter Wide Mechanical & Contracting Ltd. [1998] O.J. No. 616. In these decisions, the courts were careful to circumscribe the surety’s rights.
[39] I want to convene the next trial conference by videoconference on either the morning of June 2, 2022 or the afternoon of June 3, 2022. The parties must confer forthwith and decide as to an exact time in those time periods for the trial management conference and must advise my Assistant Trial Coordinator. The parties must in advance confer and try to come to an agreement as to the vetting process.
[40] Concerning costs, Mr. MacLellan wrote me a letter on April 24, 2022 advising that the parties had agreed that the successful party would be paid $30,000. I, therefore, order that the Timely Claimants pay Zurich costs in the amount of $30,000 in thirty days.
DATE: May 12, 2022 ______________________________
ASSOCIATE JUSTICE C. WIEBE