Court File and Parties

COURT FILE NO.: CV-20-1231 DATE: 2023-03-16 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: NICHOLAS MARK CHESNEY, CHESNEY DESIGN & BUILD and JEREMY EVANS, Plaintiffs/Responding Parties AND: 2706669 ONTARIO INC. and ADAM CHRIS MALAMIS, Defendants/Moving Parties

BEFORE: Tranquilli J.

COUNSEL: Mr. Chapman, W., for the Plaintiffs/Responding Parties Mr. MacLean, K., for the Defendants/Moving Parties

HEARD: February 8, 2023

Endorsement

Introduction

[1] The defendant 27006669 Ontario Inc. moves under s. 44 of the Construction Act, R.S.O. 1990, c. C. 30 for an order reducing the security posted by the defendant in respect of a construction lien registered by the plaintiffs regarding the renovation of a London residential property.

[2] The defendants acknowledge the plaintiffs have properly claimed lienable services and materials. However, they submit the plaintiffs included either non-lienable services and materials or clearly inflated the value of other lienable services in respect of their supply of goods and services in the renovation of that property.

[3] The defendants submit that this action is a lost profit/lost opportunity claim for equitable relief masquerading as a construction lien. The security posted in respect of the construction lien must be reduced from $173,125.00 to $15,903.19. The defendants contend this is the proper face value of the lien, including 25% for security for costs.

[4] The plaintiffs submit that the motion should be dismissed. The plaintiffs argue that there is a genuine issue requiring trial on whether the amounts claimed are properly the subject of the lien. The action is already set down for trial in accordance with the expedited procedure under the Construction Act and scheduling will be addressed at the April 2023 assignment court.

[5] These reasons explain why the court is satisfied that the defendants are entitled to the relief sought on the motion.

[6] The court finds that the defendants have established, on a balance of probabilities, that the plaintiffs included either non-lienable or exaggerated goods and services in the lien claim. At its core, the court is satisfied that the basis for the disputed items in the lien are in the nature of a claim for an equitable interest by way of a share of the value of the subject property, based upon an alleged agreement among the parties and the subsequent work performed by the plaintiffs. However, to properly be the subject of a lien, the Construction Act requires that the claim must come within the definition of “services or materials supplied to the improvement.” Damages at large, such as lost opportunity costs, loss of profits or aggravated damages will not form the basis for a valid lien: Selectra Inc. v. The Corporation of the Town of Penetanguishene, 2016 ONSC 2293 at para. 14.

[7] The security posted to vacate the lien shall be reduced from $173,125 to $15,903.19.

Background

[8] It is useful to review the factual contentions that form the background of the contractual dispute, the registration of the construction lien against the title of a residential property municipally known as 73 Cartwright Street (“the Property”) and the events that preceded this motion.

The Plaintiffs’ Version

[9] The plaintiffs allege they entered into a contract with the defendants for the “total price” of $138,500 for renovation of the Property. The plaintiffs plead that they completed the work under the contract on May 20, 2020 and rendered an invoice to the defendants for that sum. They claim damages in the sum of this invoice and seek payment of its claim from the proceeds of the security deposited with the court by the defendants to vacate the lien.

The Defendants’ Version

[10] The defendants acknowledge there was an agreement for the provision of renovation services; however, outline a significantly different version of events. They claim this dispute arose from a business venture between the parties that soured and in which the plaintiffs are now trying to claim what amounts to an equitable or other interest in the Property, and which are not properly the subject of a construction lien.

[11] The defendants allege the parties discussed entering into a partnership for the purchase and renovation of residential rental properties, where the defendant Malamis would provide capital for the purchase of properties and the plaintiffs Chesney and Evans would provide the construction and labour. The Property was to be the first project in their joint venture. However, the plaintiffs were unable to secure financing for their contribution to the purchase of the Property. The defendant Malamis incorporated the defendant corporation in July 2019 for the purpose of acquiring the Property. Malamis was the sole officer, director, and shareholder. The corporate defendant closed the purchase of the Property and is registered on title. The defendants claim the plan was to revisit the plaintiffs’ future legal or equitable interest in the Property at a later date. In the meantime, the defendant pleads that the corporate defendant and the plaintiff entered into an oral contact for the renovation of the Property, where the plaintiffs would provide general contracting and renovation services for the project in accordance with a budget submitted by the plaintiffs. The completion date was set for October 31, 2019.

[12] The defendant contends the plaintiffs failed to complete work on the Property by the agreed upon completion date of October 31, 2019 and that the plaintiffs’ work on the Property was deficient, and, in some cases, contrary to the Building Code. By May 2020, the work remained incomplete, deficient, and more than 50% over the estimated budget established at the outset of their agreement.

[13] The corporate defendant contends that on May 20, 2020, it terminated the contract with the plaintiffs because of these performance issues and requested a final invoice.

Registration of the Lien

[14] Two days later, on May 22, 2020, a construction lien was registered against the Property on behalf of the plaintiffs in the amount of $138,500.

The Invoice

On May 29, 2020, the plaintiffs then submitted an invoice to the defendants for stated goods and services for “Whole House Renovation” in the amount of $138,500. The defendants assert the following items are either non-lienable and exaggerated or exaggerated and unsubstantiated:

• Labour Hours @ $100/hour for 1385 hours - broken down to further items including the disputed entries set out below: $138,500
• Property Management Fee: $20,000
• Real Estate Consulting Fee: $10,000
• Demolition and Garbage: $5,000
• Framing Walls: $5,000
• Drywall: $4,500

[15] The defendants immediately demanded that the plaintiffs particularize and substantiate the work claimed on the invoice with a line-by-line breakdown.

[16] By responding email, the plaintiffs advised: “This joint venture was a business partnership which we agreed to being third partners each. Our compensation is based on the equity increase. We were not paid directly by the hours of work performed for this project so the statement is irrelevant.”

The Construction Act Action

[17] The plaintiffs’ action pursuant to the Construction Act was issued on July 30, 2020. They seek various forms of declaratory relief, including entitlement to payment of the invoice of $138,500 from the funds paid into court as security to vacate the lien and in the alternative, damages for breach of contract in the same amount.

[18] In their statement of defence, the defendants agree there was an oral contract with the plaintiffs for the provision of goods and services in the renovation of the property. However, they deny that there was agreement to a “total price” under the contract. The defendants claim damages estimated in the amount of $115,000 for breach of contract or alternatively in negligence and negligent misrepresentation repairs of deficient work, lost rental revenue, lost investment and carrying costs. The defendants claim a right of set-off for these issues in the event they are found liable for any sums claimed by the plaintiffs and similarly counterclaim for these damages.

[19] The defendants also plead the lien claim amount is exaggerated or is not properly the subject of a construction lien but represents damages for an unpleaded claim to an equitable interest in the property.

Cross-Examination of the Plaintiffs

[20] The plaintiffs Chesney and Evans were cross-examined on the lien claim pursuant to the Construction Act on February 2, 2021. Questioning focused on the nature of the disputed goods and services represented in the invoice and the production of contemporaneous documents in support of those expenses. The plaintiffs gave 29 undertakings with the net effect that they would provide all records and receipts in support of the amounts claimed on these disputed items in their invoice.

[21] The plaintiffs confirmed they had been paid $21,080.82 by the defendant corporation for goods and services provided in respect of the renovation of the Property.

Vacating the Lien

[22] On March 18, 2021, the corporate defendant’s mortgagee vacated the construction lien on posting the amount of $138,500 for the face value of the lien and a further $34,625 as security for costs, for a total payment of $173,125.

The Motion

[23] The defendants brought this motion originally returnable October 28, 2022, seeking a reduction of the security and return of funds to its mortgagee.

[24] The defendant Malamis delivered an affidavit setting out the details of the defendants’ version of the contract and the surrounding events as summarized above.

[25] The plaintiffs delivered a responding affidavit sworn by plaintiffs’ counsel’s law clerk. She deposed on information and belief that the plaintiffs’ testimony on cross-examination that the lien claim is in the amount of $138,500 is correct and was true and accurate.

Issues

[26] The questions for the court on this motion are:

1. Should the security be reduced for non-lienable claims?
2. Should the security be reduced for exaggerated claims?

[27] The Construction Act governs the determination of this motion. Section 44(5)(b) permits the court to order the reduction of the amount of security posted with the court “where it is appropriate to do so.”

[28] The court’s only function on this motion is to assess the appropriate quantum of security. These reasons should not be interpreted as having any bearing on the merits of the claim or counterclaim.

[29] It appears to be generally accepted that the test on a motion of this nature is similar to but not the same as the test on a summary judgment motion. This motion does not require an extensive review of the merits or a determination of the viability of contested questions of fact. The narrow question on which the court must be satisfied based on the motion materials is whether there is no reasonable prospect of the plaintiff proving a lien for the amount it has claimed: Structform International Ltd. v. Ashcroft Homes Construction Inc., 2013 ONSC 4544 at paras. 12-13; Selectra, at para. 14.

Analysis

1. Should the security be reduced for non-lienable claims?

[30] The defendants submit the plaintiffs have claimed for non-lienable services and materials in respect of the $10,000 fee claimed for real estate consulting and the $20,000 fee claimed for property management.

[31] On cross-examination, the plaintiff Evans testified that the real estate consulting fee was calculated based upon the value of his time in researching and recommending the purchase of the Property to the defendants. The plaintiffs acknowledged there was no discussion with the defendants about a real estate consulting fee.

[32] Mr. Evans also explained that the property management fee was calculated based upon the estimated increase in the value of the Property following the plaintiffs’ eviction of a tenant when the renovation project began.

[33] The court accepts the defendants’ submission that neither of these fees are lienable claims under the Construction Act.

[34] A person who supplies services or materials to an improvement for an owner has a lien upon the interest of the owner in the premises improved for the price of those services or materials: s. 14(1). Thus, the real estate consulting fee cannot be the subject of the lien as those activities allegedly occurred before the defendant corporation acquired title to the Property before the renovation work began. In my view, under s. 14 of the Act, a lien interest could not have arisen in respect of those activities.

[35] Moreover, neither of these claimed services qualify as “improvements” as defined in the Act. These services were not in the nature of alterations, additions, capital repair, or construction. Neither claim related to the “supply of services” in respect of an “improvement” as defined in the Act.

[36] General overhead expenses and general managerial work performed that is not directly related to the construction of the improvement (as distinguished from site supervisor work), will not entitle the claimant to a lien. Those services do not fall within the contractual chain on construction projects that are given a financial preference and a security interest by the Construction Act: Selectra, paras. 15, 24.

[37] The amounts claimed in respect of real estate consulting and property management services will therefore be reduced from the posted security.

[38] In any event of this finding, these reasons will now explain that these claims are also not lienable due to the lack of supporting documentation.

2. Should the security be reduced for exaggerated claims?

[39] The plaintiffs were cross-examined on the particulars of their invoice pursuant to the Construction Act on February 2, 2021. Questioning focused on the nature of the services represented on the invoice and the provision of documentary evidence in support of those claimed services and expenses. The plaintiffs undertook to provide all records and receipts in support of the amounts claimed in their invoice.

[40] The plaintiffs fell short in substantiating these claimed expenses with such documentary support as demanded on their cross-examination. There are no log sheets, time sheets, mileage logs or other contemporaneous documents that confirm these claimed fees and expenses.

[41] The defendants submit that the disputed items on the invoice should be excluded from the lien as they are willfully exaggerated. The plaintiffs failed to substantiate the work claimed when given the opportunity to do so.

[42] The primary example from this invoice is the overall claim for $138,500 in labour. The plaintiffs advise this item was based on the provision of 1,385 hours of labour at the rate of $100/hour. This is at significant odds with the data from the project management software program used by the parties during renovation of the Property and the duration of the agreement. That information records that the total value of labour, supplies and materials is $38,506.90 inclusive of HST, with 76.8 hours of logged labour. As observed by the defendants on the motion, there is an approximate $100,000 “hole” in justifying the invoiced labour costs.

[43] When asked to explain this fee, the plaintiffs responded that the labour hours claimed on the invoice were based upon the equity increase on the Property as the plaintiffs were not being paid as they expected. On cross-examination on this item of the invoice, the plaintiff Evans advised he was not necessarily keeping track of his hours and that he might have based it on a “guesstimate” of his time spent on the Property. Similarly, the plaintiff Chesney acknowledged he did not keep track of his hours. There is similarly no justification for the hourly labour rate charged at $100 on the invoice, in contrast to the substantiated hourly labour rates of $20.

[44] The plaintiffs have not produced and apparently cannot produce contemporaneous timesheets or other documentation to substantiate their claim for labour fees. Similarly, there are amounts on the lien claim for drywall, framing and demolition that have not been substantiated by documentation. The plaintiffs can only document $1,597.94 of the $5,000 claimed in framing services. Further scrutiny identified a double entry for the provision of board and batten siding. Finally, the real estate and property management fees that the court has already excluded as non-lienable are also not supported by documentation, such as contemporaneous time sheets, logs, or receipts.

[45] The plaintiffs delivered an affidavit in response to this motion, sworn by plaintiffs’ counsel’s law clerk. She deposes on information and belief that both plaintiffs testified that the lien claim in the amount of $138,500 was true and accurate. In argument, the plaintiffs asserted that the parties had an agreement analogous to a fixed price contract where they agreed they would be compensated based on their two-thirds share of the total value of the Property. As such, particulars such as the specific number of hours they worked was irrelevant. The plaintiffs argue that in this context, the motion should be dismissed as the issues are better dealt with at trial for which the date is to be fixed in the near future.

[46] The plaintiff relies on the result in 1350325 Ontario Inc. v Walden Group Canada Ltd., 2006 ONSC 13556, where the court explained that while it tended toward a view that the plaintiff should not be entitled to a lien, it dismissed the defendant’s motion to vacate the lien. In that case, the court held the allegations and credibility could only be properly tested at trial.

[47] Walden is distinguishable from these circumstances. In that decision, the absence of cross-examinations in the face of conflicting affidavits as to the nature of the agreement and the consulting services allegedly provided by the lien claimant led to the court’s dismissal of the defendant’s motion to vacate the lien. In contrast, in this case, there were cross-examinations, where the plaintiffs were tested on their claims in the invoice. They gave undertakings to provide documentation and receipts in support of these disputed claims. No such documentation was provided. An affidavit based on information and belief that merely asserts on a conclusory basis the truth of the claim for the total lien amount cannot logically raise a triable issue as to the quantum of the lien. The plaintiffs offered no sworn evidence in support of their bald statement in court that there was an agreement that they would be paid their share of the total value of the Property.

[48] Cross-examination of a lien claim under the Construction Act is an opportunity for the examining party to obtain full disclosure of all evidence relied upon by the lien claimant to substantiate the quantum of the lien, the lienability of claimed services and the timeliness of the lien. Where requested by the defendant, the lien claimant has an obligation to produce all supporting documents relevant to the quantum and lienability of the claims: GTA Restoration Group Inc. v. Baillie, 2020 ONSC 519 at paras. 76-77.

[49] The disputed claims shall accordingly be excluded as being exaggerated or inflated. The plaintiffs were given a fair opportunity to substantiate the nature and quantum of their claims in support of a lien. They have not done so.

Disposition

[50] For the foregoing reasons, the defendants’ motion is granted. Orders shall issue as follows:

a. The security posted in respect of the plaintiffs’ lien shall be reduced from $173,125 to $15,903.19 pursuant to s. 44(5)(b) of the Construction Act; and b. The Accountant of the Superior Court of Justice shall return the reduced security to Libro Credit Union, c/o Harrison Pensa LLP, Attn” Michael Cassone, 450 Talbot Street, London, Ontario, N6A 4K3.

[51] The defendants were wholly successful on their motion. The parties are encouraged to resolve the matter of costs. I acknowledge that both parties previously submitted their respective cost outlines/bills of costs to the court. Unfortunately, the court cannot locate the defendants’ cost materials. I therefore regrettably ask the defendants to refile their bill/costs outline along with any written submissions, if necessary as I will now direct.

[52] If the parties are unable to resolve costs, the defendants shall deliver their position on costs by March 31, 2023 and the plaintiffs shall deliver their position on costs by April 12, 2023. There is no right of reply without leave. Written submissions are limited to two pages, excluding cost outlines/bills of costs and any offers to settle. Again, the court acknowledges previous receipt of the plaintiffs’ bill of costs.

Justice K. Tranquilli Date: March 16, 2023