TAB 8

2016 CanLIIDocs 4380

36th Annual Civil Litigation Conference
Friday, November 18 – Saturday, November 19, 2016

Construction Law:
What’s new?

Nadia Authier
Rasmussen Starr Ruddy LLP
&
Owen Bourns
Perley-Robertson, Hill & McDougall
LLP
 CONSTRUCTION LAW: WHAT’S NEW?

Nadia Authier Owen Bourns

&
Rasmussen Starr Ruddy LLP Perley-Robertson, Hill & McDougall LLP

2016 CanLIIDocs 4380

A. INTRODUCTION

This year there are two significant developments in the Ontario case law that we outline
herein, along with the release of a major report reviewing the Construction Lien Act 1 (the
“CLA”) that has been completed by Bruce Reynolds and Sharon Vogel for the Ministry of
the Attorney General.

First, the Divisional Court decision in Robert Nicholson Construction Company Limited v.
Edgecon Construction Inc. 2 (“Edgecon”), determined two issues of importance with
respect to the trust fund sections of the CLA, confirming that subcontractors are not proper
beneficiaries to the owner’s trust created by s.7 of the CLA.

Second, two cases, one Court of Appeal decision [Ross-Clair v. Canada (Attorney
General)3 (“Ross-Clair”)] and one Divisional Court decision [Jessco Structural Limited v.
Gottardo Construction Limited 4 (“Jessco”)], have strengthened the extent to which Parties
may rely on the payment terms in the contract between the parties, specifically with
respect to claims for extra work.

Lastly, Bruce Reynolds and Sharon Vogel completed their 14-month review of the CLA
and released a 350-page report for the Ministry of the Attorney General and the Ministry

1 Construction Lien Act, R.S.O. 1990, c. C.30 <https://www.ontario.ca/laws/statute/90c30>

2 Robert Nicholson Construction Company Limited v. Edgecon Construction Inc., (2016) ONSC 3107 (Ont. Div. Ct.)
<http://canlii.ca/t/grvc2>
3 Ross-Clair v. Canada (Attorney General), (2016) ONCA 205 (Ont. C.A.), <http://canlii.ca/t/gnps8>
4
Jessco Structural Limited v Gottardo Construction Limited, (2016) ONSC 2189 (Ont. Div. Ct.),
<http://canlii.ca/t/gs0md>

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of Economic Development, titled “Striking The Balance: Expert Review of Ontario’s
Construction Lien Act” 5 (the “Report”), that includes their recommendations moving
forward. This paper will highlight some of the specific changes the Report recommends.

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B. SUBCONTRACTOR NOT A BENEFICIARY TO OWNER’S STATUTORY TRUST

In the Edgecon decision the Divisional Court confirmed that: (a) a subcontractor is not a
proper beneficiary to the Owner’s Trust created by section 7 of the CLA; and (b) the
payment of funds to a contractor does not result in the payor being in “effective control”
of the contractor or its related activities, which would have potentially brought about
liability under s.13 of the CLA.

Statutory Trusts

Before getting into the case, it is helpful to briefly outline the trusts regime that is set out
in the CLA. In addition to establishing the construction lien scheme in Ontario, the CLA
establishes certain trust funds. The beneficiaries of the trust funds are those parties
whom the owner, contractor or subcontractor has contracted and are owed money arising
from the contract.

The “Owner’s Trust”, whereby the owner is the trustee, is created by section 7 of the CLA,
which states that:

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. [emphasis
added]

5Striking The Balance: Expert Review of Ontario’s Construction Lien Act, by Bruce Reynolds and Sharon Vogel, April
30, 2016 <http://www.constructionlienactreview.com/wp-content/uploads/2015/07/Striking-the-Balance-Expert-
Review-of-Ontarios-Construction-Lien-Act.pdf>

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The “Contractor’s Trust”, whereby the contractor is the trustee, which applies equally to
subcontractors contracting with further subcontractors below them, is created by section
8 of the CLA, which states that:

8. (1) All amounts,

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(a) owing to a contractor or subcontractor, whether or not due or
payable; or
(b) received by a contractor or subcontractor,
on account of the contract or subcontract price of an improvement
constitute a trust fund for the benefit of the subcontractors and other
persons who have supplied services or materials to the improvement who
are owed amounts by the contractor or subcontractor. [emphasis added]

Therefore, an Owner or Contractor becomes the trustee of the trust fund and their
obligation as trustee is that they shall not appropriate or convert any part of the fund for
their own use or for any use inconsistent with the trust until everyone below them in the
construction pyramid has been paid. What uses are inconsistent with the trust is a topic
for another paper, however, it certainly includes paying overhead costs, paying for work
on other projects, and personal use.

The main benefit of theses statutory trusts is that section 13 of the CLA also establishes
personal liability for breaches thereof as follows:

13. (1) In addition to the persons who are otherwise liable in an action for
breach of trust under this Part,
(a) every director or officer of a corporation; and
(b) any person, including an employee or agent of the corporation, who
has effective control of a corporation or its relevant activities,
who assents to, or acquiesces in, conduct that he or she knows or
reasonably ought to know amounts to breach of trust by the corporation
is liable for the breach of trust. [emphasis added]

Therefore, to the extent there has been a breach of trust (s.7 or s.8) and funds have been
used in a manner inconsistent with the trust by the trustee (owner or contractor), a

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beneficiary may bring a claim against those individuals and entities listed in s.13 of the
CLA.

The additional benefit in the ability to advance a trust claim is that the normal Limitations
Act 6 applies as opposed to the stricter lien deadlines otherwise found in the CLA.

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Robert Nicholson Construction Company Limited v. Edgecon Construction Inc.

The Edgecon decision concerned a subcontractor, Robert Nicholson Construction

Company (“RNCC”), that was not fully paid for the services and materials delivered to the
project. RNCC secured default judgment against the general contractor Edgecon, but
was unable to collect. Thereafter, RNCC commenced a breach of trust action against the
owners of the project (the “Owners”).

RNCC brought a successful motion for summary judgment where the motion judge, King
J., determined that the Owners had breached their trust obligations by making payment
to a company related to Edgecon, rather than Edgecon itself, at Edgecon’s request.
Therefore, the motion judge determined that the payment to the related company was a
“use inconsistent with the trust”. 7

The problem was that, regardless if the above payment was a use inconsistent with the
trust, the plaintiff RNCC was not a beneficiary of the Owner’s Trust. By the time the
appeal hearing was heard, the respondent RNCC conceded that: 8
[t]he motion judge erred in law when he found that a subcontractor could
be a beneficiary of the statutory trust fund created under s. 7(1) of the Act,
as the wording of that section is clear; the owner’s trust fund exists “for
the benefit of the contractor”. Under s. 8 of the Act, a separate and distinct
trust obligation is imposed on contractors and subcontractors, the
beneficiaries of which are other subcontractors (Colautti Construction

6 Limitations Act, 2002, S.O. 2002, c. 24, Sched. B <https://www.ontario.ca/laws/statute/02l24>

7 Edgecon at para 4
8 Edgecon at para 8

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 Ltd. V. Ashcroft Developments Inc. et al, 2011 ONCA 359 (C.A.) at para.
73). [emphasis added]

Further, the Court confirmed that the respondent was correct to concede the point. 9

However, the respondent RNCC submitted that there was another basis for summary

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judgment under s.13 of the CLA, which concerns who may be liable in an action for breach
of trust, as outlined earlier in this paper. RNCC’s argument was that, because the owners
had “control over sending the general contractors the money they were entitled to, the
Appellants had effective control of one of the general contractors’ ‘related activities;”. 10

The Divisional Court held that because there was no evidence, nor even the allegation,
that the owners were knowingly participating in any scheme to defeat the claim, the
question becomes whether paying a general contractor is enough to create a situation
where an owner is in sufficient control of the general contractor’s activities so that the
owner may liable under s.13 of the CLA.

The Court properly rejected the argument, confirming that making payments to a
corporation does not equate to having control over that corporation’s “relevant activities”,
as required by s.13. The absurdity of such a position would be that: 11
[E]very owner is potentially liable under this section. Furthermore, in
construction projects that are financed by lending institutions, the
payments to general contractors can come directly from those lending
institutions.

Therefore, what we learn from Edgecon is that:

a. Owner’s Trusts, under s.7 of the CLA, are explicitly to the benefit of general
contractors and not all those before them in the pyramid. Subcontractors are the
beneficiaries of trusts created by s.8 of the CLA.

9 Edgecon at para 7
10
Edgecon at para 11
11 Edgecon at para 17

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 b. The payment of funds to a contractor by an owner, even if to the contractor’s
related company, does not constitute a breach of trust under s.13 and does not
evidence that the Owner has sufficient control of the corporation or its “related
activities”.

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C. CONTRACT TERMS GOVERN CLAIMS FOR EXTRAS

Ross-Clair v. Canada

This March 2016 Court of Appeal decision reaffirmed the Court’s willingness to enforce
specific contract requirements in order for contractors and subcontractors to secure
payments for extra work. Specifically, the contractor’s correspondence to the owner
regarding extra work completed was deemed to include insufficient particulars, contrary
to the contract, thus disqualifying the contractor for any claim for compensation. The
contractor also delivered a fulsome report detailing its claim for extras, but the report was
provided well past the deadline set forth in the contract and, therefore, was given no
weight by either the application judge or the Court of Appeal.

The contractor, Ross-Clair, entered into a contract with Public Works and Government
Services Canada (“PWC”) for the construction of offices. Ross-Clair advanced a claim
for $2,204,676 in extras. The contract between the parties set out what the Court called
a “Code” that “governed the rights and obligations relating to a claim for extras”. 12 It is
noteworthy that the contract was a standard PWC contract and not the more frequently
used standard CCDC – 2 contract, which is relevant because with respect to notices and
claims for extras, the PWC contract is more explicit regarding deadlines.

12 Ross-Clair at para 12

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The Code was mostly set out in GC 35 of the contract, which is reproduced in full at
paragraph 13 of the Ross-Clair decision. In particular, where the contractor is to assert
a claim for an extras, the Code required that Ross-Clair deliver:

→ Notice in writing of an intention to claim within 10 days of the underlying incident

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(GC 35.3); and

→ A written claim for the extra expense or loss or damage within 30 days of the Final
Certificate of Completion, which “shall contain sufficient description of the facts and
circumstances of the occurrence that is the subject of the claim to enable the
Engineer to determine whether the claim is justified” (GC 35.4).

Further, GC 35.8 specified that failure to give the above notices results in no payment
being made to the contractor in respect of the occurrence.

What happened on the project was as follows: 13

→ On December 5, 2008, Ross-Clair advised in writing that as a result of delays a

time extension was required and there would be additional costs incurred by Ross-
Clair.

→ From December 2008 to October 2009, Ross-Clair and PWC and/or the project
engineer exchanged correspondence relating to Ross-Clair’s request for an
extension of time and claim for compensation. PWC and its engineer continually
asked for more information and expressed concerns about the requested
extension of time. The final correspondence at that time was from PWC requesting
further documents and information about the claim, asserting that Ross-Clair was
responsible for all delays, reminding Ross-Clair of its contractual obligations, and

13 Ross-Clair at paras 16-28

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 agreeing to a non-compensable extension of time to complete the project to
September 19, 2009.

→ Ross-Clair sent additional correspondence on March 31, 2011 in support of its

claim, but this further information contained no breakdown of costs being claimed

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and simply provided a revised total amount. PWC again responded by confirming
that the documentation and information provided to date was insufficient.

→ Ross-Clair’s work was certified by the engineer as complete on February 10, 2012
and 15 months later Ross-Clair delivered a report called “Analysis of Delays and
Additional Report” (the “Knowles Report”)

Ross-Claim commenced the application seeking an interpretation of the contract and

order compelling the the project engineer to review the claims submitted. 14

The application judge and the Court of Appeal both agreed that the initial notice provided
was sufficient but differed on what the contractor was required to provide by way of a
written claim. For ease of reference, the contract required that a claim contain:

[…] a sufficient description of the facts and circumstances of the

occurrence that is the subject of the claim to enable the Engineer to
determine whether or not the claim is justified.

The application judge stated that this would require “more than notice but less than the
proof an arbitrator would require” and further relied on the fact that “the Contract did not
contain the phrase ‘detailed claim’ or list specific requirements for the contents of a claim
for extras”. 15

The Court of Appeal determined that the application judge erred by interpreting only one
specific provision (35.4) in isolation and not in light of the related sections of the “Code”.

14 Ross-Clair at para 6
15 Ross-Clair at para 31 and 49

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In the context of the “Code” as a whole, the Court of Appeal determined that the
requirement to provide the engineer with sufficient information to determine if a claim is
justified “requires ‘proof’ that the claim is justified”. 16

Given the Court’s determination that proof was required, the correspondence from Ross-

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Clair failed to provide support for the amount sought in its claim and, in particular, failed
to provide:

[…] information relating to the nature and extent of PWC’s responsibility

for the delay, to address whether compensation had already been paid on
account of the extra expense or to explain whether the extra expense
contained in the $1,437,976 Claim fell within the classes of expenses
compensable under GC 35.5 and GC 49 or GC 50, and, if so, in what
amount. [emphasis added]

The Court also considered Ross-Clair’s ongoing failure to respond to requests for
additional information and documents from PWC and the project engineer. Lastly, the
Knowles Report was delivered far too late for consideration. 17

The decision re-affirms that the parties to a construction contract must be familiar with
and follow the contractual requirements to pursue additional payments for extras, delay,
or damages of any kind. Where the contract is onerous in terms of requiring expedited
notices and claims, parties should ensure they have the mechanisms in place to prepare
and deliver notices and claims in a timely manner or they risk disentitling themselves to
any such claims.

Jessco Structural Limited v. Gottardo Construction Limited

This is a 2016 decision of the Divisional Court which, like the Ross-Clair decision, relied
on the stringent terms of the contract between the parties to deny a claim for extras, this
time by the subcontractor Jessco Structural Limited (“Jessco”). The appeal was from a

16 Ross-Clair at para 61
17 Ross-Clair at para 65

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motion decision on the narrow legal issue of whether the owner, Gottardo Construction
Limited (“Gottardo”) could rely on the contractual provisions to avoid compensating
Jessco for the extra work it did. 18

In accordance with the contract between the parties, there was to be: 19

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(a) “No changes without a written order from the [Gottardo]”; and

(b) “No extras will be considered for any reason whatsoever unless negotiated with
[Gottardo] before the work is done”.

At the request of the owner Gottardo’s site superintendent, Jessco performed extra work,
beyond what it was contractually obligated to do. Upon completion of the work, the
superintendent also signed purchase orders (note: not change orders) presented by
Jessco.

The issue before the motion judge and the Divisional Court was whether the conduct of
the site superintendent amounted to a waiver of the contract or its acquiescence to
Jessco’s non-compliance with it. The Court confirmed that for the waiver to have occurred
there “must be ‘an unequivocal and conscious decision to abandon the right to rely on
[the contract]’ Technicore Underground Inc. v. Toronto (City), 2012 ONCA 597 at para.
53”.

Jessco performed the work without a written change order and there were no other
discussions (or negotiations) with Gottardo other than the request by the site
superintendent to do the work. The motion judge held that the signed purchase orders
merely confirmed the work was done and did not constitute an agreement that the items

18
Jessco Structural Limited v. Gottardo Construction Limited, (2016) ONSC 2189 (Ont. Div. Ct.) [“Jessco”]
19 Jessco at paras 8-9

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signed were additional to the contract. 20 There were no examples of Gottardo previously
agreeing to provide payment to Jessco despite non-compliance with the contract.

The Divisional Court upheld the motion judge’s determination that site superintendent’s
behaviour did not constitute waiver. The Court briefly reviewed several similar cases

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where a contractor or subcontractor was paid for extra work despite not following the
notice and claim procedure set out in the contract. However, in each case, the “court was
satisfied on the facts that the parties no longer considered themselves to be bound by the
strict requirements in the contract”. 21 Key to the Court’s decision was that there was no
prior conduct by the owner Gottardo, such as paying for extras occurring and claimed in
a similar fashion, that evidenced a willingness to longer be bound by the contract’s terms.

It is noteworthy that there is a lengthy and compelling dissent from Justice J. Wilson,
which is critical of counsel for failing to put relevant case law before the motion judge and
the Divisional Court, wherein she primarily states that, as a matter of established law,
“[o]rally requesting extra work outside the contract constitutes waiver by conduct”. 22 The
motion judge found as fact that the extras requested were beyond the scope of work
Jessco was contractually obligated to do. According to Justice Wilson, the difference
between the cases cited by counsel and the majority of the panel is that they concerned
scenarios where extras requested were within the scope of the existing contract.
Conversely, there is more appropriate case law where the extras requested were outside
the existing contract. She cites multiple cases in support of that proposition. 23

20 Jessco at para 13
21 Jessco at para 22
22 Jessco at para 58

23
See DIC Enterprises Ltd. v. Kosloski, [1987] C.L.D. 1211 (Sask. Q.B.), at paras. 30-32 and 34 (quoting Immanuel
Goldsmith from Canadian Building Contracts, at pp. 87-88) and para. 37; 2016637 Ontario Inc. o/a Balkan
Construction v. Catan Canada Inc. et al., 2013 ONSC 4727, 26 C.L.R. (4th) 84, at para. 14; Hydrastone Inc. v.
Clearway Construction Inc., 2015 ONSC 2669 (CanLII); Domco Construction Inc. v. Aliva Holdings Inc., 2003 SKQB
506 (CanLII)

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Counsel for Jessco has confirmed that leave to appeal this decision is being sought from
the Court of Appeal, materials have been filed, and the parties are awaiting a decision.
Given the strong and detailed dissent, it seems unlikely that leave will not be granted.

Taking into account both the majority and minority decisions, we can safely say that:

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(a) Where work is being requested for completion in a manner other than as set out in
the contract and the work concerns items outside the existing contract then the
request itself constitutes waiver, and

(b) Where work is being requested for completion in a manner other than as set out in
the contract and the work concerns items within the existing contract then the strict
contract terms will apply.

It is advisable to ensure that all clients are familiar with those provisions in the contract
relating to extra work and to follow notice and claim provisions to the extent possible.

D. REVIEW OF CONSTRUCTION LIEN ACT

Introduction

There has been no major review or amendment of the Construction Lien Act (the “Act”)
since its inception in 1983. Although some of the sections have been amended over the
years to reflect the changing realities of construction law practice, such as the elimination
of the affidavit of verification 24 (this amendment was implemented to reflect the reality of

24
Consolidation Period: From July 1, 2011
How lien preserved
34. (1) A lien may be preserved during the supplying of
services or materials or at any time before it expires,
(a) where the lien attaches to the premises, by the
registration in the proper land registry office of a claim
for lien on the title of the premises in accordance with
this Part; and
Historical Version for the period Jan 1, 2003 to Jun 21, 2006
How lien preserved
34. (1) A lien may be preserved during the supplying of
services or materials or at any time before it expires,
(a) where the lien attaches to the premises, by the
registration in the proper land registry office of a claim
for lien on the title of the premises in accordance with
this Part; and

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registering liens via E-Reg/Teraview), there have been no significant changes to the Act
in the past 23 years.

In 2015, the Ministry of the Attorney General and the Ministry of Economic Development,
Employment and Infrastructure (hereinafter jointly referred to as the “Ministries”)

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announced the review of the Construction Lien Act. Appointed for the task were R. Bruce
Reynolds and Sharon Vogel, both of Borden Ladner Gervais.

The purpose of the review was to assess the effectiveness of the Act in achieving its
stated purpose, to address prompt payment issues and determine whether the Act
provided adequate dispute resolution solutions to the construction industry.

This section provides a summary overview of the recommendations of Bruce Reynolds

and Sharon Vogel to the Ministries. The recommendations were released to the public on
September 26, 2016 and posted on the website: www.constructionlienactreview.com.

The review conducted by Reynolds, with the assistance of Vogel, was not an independent
public inquiry, rather the Ministries asked that they provide an expert legal opinion on the
issues, as well as recommendations on changes. In total 100 recommendations were
made in the Report. To assist them in their review, Reynolds and Vogel sought the

(b) where the lien does not attach to the premises, by

(b) where the lien does not attach to the premises, by giving to the owner a copy of the claim for lien together
giving to the owner a copy of the claim for lien. R.S.O. with the affidavit of verification required by subsection
1990, c. C.30, s. 34 (1); 2010, c. 16, Sched. 2, s. 2 (5) (6). R.S.O. 1990, c. C.30, s. 34 (1).

[…] […]
Affidavit of verification
(6) Repealed: 2010, c. 16, Sched. 2, s. 2 (9). (6) A claim for lien shall be verified by an affidavit of the
person claiming the lien, including a trustee of the
workers' trust fund where subsection 81 (2) applies, or
of an agent or assignee of the claimant who is informed
of the facts set out in the claim, and the affidavit of the
agent or assignee shall state that the agent or assignee
believes those facts to be true. R.S.O. 1990, c. C.30, s.
34 (6).

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opinions and comments of various stakeholders from both the public and private sectors.
They also examined the legislation and practices in other jurisdictions such as the United
States, the United Kingdom and Australia.

In the pages that follow, the reader will find an overview of some of the recommendations

2016 CanLIIDocs 4380

which have been made, which will help those practicing in construction law to better
understand the changes which may be implemented by the Province in the future. The
Ministries have yet to indicate, which if any, of the recommendations will be turned into
amendments of the Act or introduced through new legislation.

The review carried out by Reynolds and Vogel included a review of a number of topics,
including the following: 25
1. Lienability - whether the definitions contained in the Act for “improvement”,
“materials”, “supply of services” and “owner” are adequate to reflect the realities of
the modern construction project;
2. The adequacy of the timing and procedure for the preservation, perfection and
expiry of liens;
3. Prompt payment for the services and materials supplied;
4. Proof of financing – the ability to determine whether the requisite funds are
available to cover the costs of construction;
5. Trust provisions;
6. Whether the nature of the intended summary procedures in the Act are effective;
7. Surety bonds and default insurance; and
8. Alternative dispute resolution.

25Striking the Balance: Expert Review of Ontario’s Construction Lien Act, R. Bruce Reynolds and Sharon Vogel, April
30, 2016, p. 10, online: <http://www.constructionlienactreview.com/wp-content/uploads/2015/07/Striking-the-Balance-
Expert-Review-of-Ontarios-Construction-Lien-Act.pdf> [Construction Review].

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The within paper outlines a selection of these recommendations which, if implemented by
the Province, will significantly change the practice of construction law, which has been at
a status quo for over 20 years.

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Recommendations

Lienability

The definition of “improvement”

Prior to the registration of a construction lien, it is necessary to determine whether or not

the services and materials supplied provide lien rights to the contractor/subcontractor.

The definition of “improvement” was previously amended following the Ontario Court of
Appeal decision in Kennedy Electric Ltd. v. Dana Canada Corporation. 26 In its decision,
the Court of Appeal upheld the lower court and Divisional Court decisions which found
that the supply of services and materials for the installation of an assembly line in a plant
did not constitute an “improvement” and as such were not lieanable. In response to this
decision, the definition was changed to included reference to include the installation of
“industrial, mechanical electrical or other equipment” which is “essential to the normal or
intended use of the land.” 27

Despite this amendment to the definition, there remain questions as to whether services
and materials supplied for the purposes of maintenance of a property constitute an
“improvement” for which lien rights would arise. This has been discussed and debated in
a number of cases. When it comes to maintenance the question to be answered is
whether the work has increased the value of the property, or simply allows the value of

26 2007 ONCA 664.

27 Construction Review, supra note 25, at p. 10>.

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the property to remain the same. Maintenance of a roof through the replacement of a few
missing shingles or repainting parking lot lines, would likely not constitute a “lienable”
service, however, the complete replacement of a roof or the repairs and replacement of
asphalt in a parking lot would. Although both scenarios constitute maintenance items,
only the latter would serve the purpose of increasing the value of the property and qualify

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as a lienable repair, rather than non-lienable maintenance item. However, this distinction
is not always easy to identify and has led to a number of disputes over whether the
services and materials provided are properly lienable.

In order to reduce the number of disputes related to whether work constitutes a lienable
service, Reynolds and Vogel have recommended that the definition of “improvement” be
amended to refer to “any alteration or addition to the land and any capital repair to the
land 28” as well as the addition of a definition for the term “capital repair”. It was proposed
that “capital repair” be defined as: “all repairs intended to extend the normal economic life
or to improve the value and productivity of the land, or building, structure or works on the
lands, but not including maintenance, work performed in order to prevent the normal
deterioration of the land or building structure or works on the land and to maintain them
in a normal functional state 29”.

The distinction between a lienable repair and non-lienable maintenance was reviewed
within the Report, and Reynolds and Vogel included a comparison chart 30 which is set
out below, the contents of which are useful in assisting in the identification of whether
work would be classified as a “capital repair” item:

Capital (Repair) Current (Maintenance)

28 Ibid at p. 16.
29 Ibid.
30 Ibid at p. 13.

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 Increase the value of the land, building, No change or nominal increase to the
structure or works value of the land, building, structure or
works

Higher degree of permanence Temporary, low degree or permanence

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Upgrade to the land, building, structure or Replacement of similar quality or
works correction of defect.

Definition of “price”

One of the issues faced by many construction law practitioners is whether or not it is
appropriate or acceptable to include the additional costs incurred by a contractor arising
from delays in the completion of the work.

There are differing opinions on whether delay costs and damages are properly lienable
amount. Some lawyers are of the view that these amounts can never be included in a
lien, while others have adopted the approach that increased labour, material, equipment
and rental costs incurred as a result of the delay are properly lienable and can be
included. The courts also vary as to whether delay costs and damages are lienable.

In order to alleviate this issue and the confusion, Reynolds and Vogel have recommended
that the definition of “price” be amended to include the “direct out-of-pocket” costs arising
from delay, such as the increased labour, material, equipment and rental costs. However,
damages resulting from the delay, such as extended overhead, financing costs and lost
opportunity, etc. would continue to be “not lienable”, and should only be put forward as a
separate head of damages in the Statement of Claim. 31

31 Ibid at p. 22.

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 Registration of Construction Liens on Municipal Lands and Public Institution Lands,
such as Universities, School Boards and Hospitals

Municipal Lands

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Currently, the Act provides that liens against municipalities for work performed on
roadways, highways and railways (i.e. subways and light rail) are to be delivered and not
registered. 32 However, where the work performed relates to a municipal building, such
as an arena or community centre, those must be registered on title to the lands.

The purpose of registering a lien is to provide security and an ability to sell the lands in
the event of a failure by the defaulting party to pay the judgment following trial. The reality
is that a court is unlikely to order the sale of municipal lands to satisfy a judgment.
Furthermore, as was pointed in the Report, municipalities cannot become bankrupt under
the Bankruptcy and Insolvency Act, in accordance with the provisions of section 17 of the
Municipal Act, 2001. 33

Reynolds and Vogel noted that it is unlikely that a court would grant the remedy of allowing
the sale of municipal lands to satisfy a lien judgment, and this, along with other factors
identified in the Report, would make it unlikely that a successful lien claimant would be
unable to recover judgment against a municipality. Therefore, it was recommended that
all municipal lands be treated like Crown lands under the Act, and simply require that liens
involving municipal projects and lands need only be delivered. 34

32 Construction Lien Act, RSO 1990, c C.30, s. 16.

33 Supra note 25, at p. 25.
34 Ibid at pp.25-26.

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 Universities, School Boards and Hospitals

Pursuant to the current provision of the Act, although universities, school boards and
hospitals receive public funds and are considered public sector institutions, the lands
owned by these institutions are all subject to the registration of construction liens, unlike

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colleges listed in the Colleges of Applied Arts and Technology Act, 2002 (“CAATA”). 35 A
contractor/subcontractor performing work at a college listed in the CAATA is required to
deliver its construction lien to the office designated in the Act.

Using the same factors and considerations as they had which led to the above noted
recommendations for amendments relating to municipal lands, Reynolds and Vogel
explored whether it would be appropriate to recommend changes to the Act in relation to
construction liens against universities, school boards and hospitals. It was recommended
that the requirements in the Act for these properties should remain unchanged. 36

The reasons relied upon to justify the recommendation that no changes be made for these
properties was the fact that these institutions remain private entities, despite the receipt
of public funds, they are for the most part autonomous and, although unlikely, are able to
declare bankruptcy under the Bankruptcy and Insolvency Act. 37

Preservation, Perfection and Expiry of Liens

Preservation

A frequent dilemma for contractors/subcontractors on projects is the determination of

whether or not to register/deliver a construction lien. There are instances when the

35 See definition of “crown” under s. 1 of the Construction Lien Act, RSO 1990, c. C.30, as well as sub-paragraph 1.1

of the regulation under the CLA, General, RRO 1998, Reg. 175.
36 Supra note 25 at p. 32.

37 Ibid at pp. 26-32.

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contractors/subcontractors know that payment will be forthcoming, but not before their
lien rights expire. The decision not to lien, where payment will potentially be received
after the expiry of their lien rights, leaves them vulnerable and without security in the event
that payment is ultimately never received. Although most contracts and/or purchase
orders provide for payment terms of approximately 30 days, the reality experienced by

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contractors/subcontractors is that the standard payment turnaround time is generally 60
to 90 days from the date of application for payment (or delivery of an invoice) - 15 to 45
days after lien rights have expired.

This practice of payments being received 60 to 90 days after delivery of an invoice results
in projects being financed on the backs of the contractors and subcontractors; the parties
who are the least financially capable of carrying such a financial burden.

Section 31 of the Act provides that the lien of a contractor is to be preserved (through
registration or delivery of the lien) within 45 days of the publication of the certificate of
substantial performance, or the date on which the contract is completed or abandoned,
which ever is earliest. For subcontractors and suppliers, the 45-day period runs from the
earlier of the date of publication of the certificate, the last date of supply, or the date the
subcontract is certified as complete under section 33 of the Act.

The current trend of longer periods between applications for and the delivery of payment,
results in more liens being registered/delivered on projects to secure the balances owed
and holdback, even though the contractors/subcontractors believe (based on payment
history during the project) that the contract funds and holdback will eventually be properly
distributed.

As a result of this prevailing practice of a longer payment period, Reynolds and Vogel
have recommended that the time for registering and/or delivering a lien be extended to
60 days. 38

38 Ibid at p. 38.

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 Certificate of Completion of Subcontract

The Act already provides for the certification of completion of subcontracts under section
33. Certifying the completion of the subcontract allows the release of the holdback
relating to that subcontract earlier, rather than having to wait until the completion of the

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project to release those funds.

For the early trades, such as the forming and concrete subcontractor or the structural
steel subcontractor, the dilemma is always whether they should lien once they complete
the work, in order to protect their entitlement to the holdback or wait and cross their fingers
that the project goes smoothly and they receive their holdback once all the work is done.

The concern for these early trades is that although there may not be financial problems
at the beginning, as a project continues sometimes delays or other factors, affect the
ability of the owner to pay for the work, or the general contractor encounters financial
difficulties, resulting in the risk of non-payment. For the early trades, if they did not
register/deliver a lien upon completion of their work, and financial issues arise later in the
project, they no longer have lien rights (because they are beyond the preservation period)
and cannot protect their entitlement to share in the pro-rata distribution of the holdback
funds.

Although the Act allows for the certification of subcontracts as they are completed the
reality is that section 33 of the Act is not commonly used.

Notwithstanding the above noted issues, Reynolds and Vogel, along with the various
stakeholders consulted on this issue, decided that making mandatory the certification of
the subcontract under section 33 of the Act would create too much of an administrative
burden for owners, consultants and general contractors, and for that reason, as well as

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others, it was decided to recommend that no changes be made to s. 33 and that this
provision should not be made mandatory. 39

Perfection of the Claim for Lien

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In order to render a preserved lien enforceable, it must be perfected by issuing a
Statement of Claim. Section 36 of the Act provides that liens are to be perfected prior to
the end of the 45-day period next following the last day (as defined by s. 31) on which the
lien could have been preserved. In other words, a preserved lien must be perfected 90
days from the last date of supply, the date on which the certificate is published, or the
contract completed/abandoned, which ever is earliest.

The need to issue a Statement of Claim within this relatively short period of time is viewed
by some in the industry as a hindrance to settlement discussions. 40

It was identified by Reynolds and Vogel, that Ontario, along with the Northwest Territories
and Nunavut, had the shortest perfection time out of all the other provinces and the
Yukon. 41

In order to achieve a balance (too long of a period for perfection would likely result in
matters languishing – more than they already do), it has been recommended that the time
for perfection be extended to 90 days from the last date on which the lien could have been
preserved. This recommended extension, combined with the recommendation to extend
the time to preserve a lien to 60-days, provides a lien claimant 150 days in which to
attempt to settle its claim, before it needs to issue its Statement of Claim. 42

39 Ibid at pp. 40-42.

40 Ibid at p. 43.
41 Ibid at p. 44.

42 Ibid at pp. 45-46.

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Although they have recommended the extension of time for the preservation and
perfection of liens, Reynolds and Vogel, saw no need to change the time in which a lien
action needs to be set down for trial. Under s. 37 of the Act, lien matters are to be set
down for trial within 2 years of the date on which the Statement of Claim was issued. It
was recommended that this remain unchanged. 43

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Preservation of liens as against a Condominium project

Where a contractor performs work on the common elements of a condominium and is not
paid, it has no choice but to register a lien on all of the condominium units (including
parkin and storage units). There is currently no PIN associated with the common
elements of the condominium. Having to proceed in this manner can be expensive and
cumbersome for the lien claimants, especially if the value of the work performed is not
extensive.

Although one lien can be registered, identifying all of the PINs which make up the
condominium can be difficult and expensive to check the title of each PIN in order to
identify the name of the owner. In new construction, registering a lien on a condominium
project is further complicated by the need to identify which units are still owned by the
developer and which have already been transferred to purchasers.

In an effort to address the sometimes cumbersome and expensive process of registering

liens against a condominium, one of the recommendations made by Reynolds and Vogel
was that a common elements PIN be established at the time the condominium is declared.
The interest of the unit owners would be then subject to the lien registered on the single
common elements PIN, allowing contractors/subcontractors to register their liens on one
PIN as opposed to all of the units. 44

43 Ibid at pp. 46-48.

44 Ibid at p. 54.

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 Summary Procedure of the Construction Lien Act

The intent of the Act is that all lien matters proceed in a summary fashion, without the

2016 CanLIIDocs 4380

need to carry out all of the procedural steps which would otherwise be required in an
ordinary action. The reality is that lien actions are often anything but summary.

The Act requires that all lien matters be conducted in the Superior Court of Justice,
regardless of the monetary amount of the lien. This results in the need to proceed in
Superior Court even if the monetary value of the lien is within the Small Claims Court
jurisdiction.

Due to the costs of proceeding in Superior Court and the delays generally associated
therewith, lien claimants sometimes decide not proceed with the registration of a lien and
simply issue a breach of contract claim in Small Claims Court. Proceeding in this manner,
the lien claimants forego the security afforded to them through the registration of a lien
and sometimes obtain judgments which cannot be collected due to an insufficiency of
assets of the defendant.

In addition to the inability to proceed in Small Claims Court on liens with a value of less
than $25,000, the increasing complexity of construction projects have resulted in
construction lien actions becoming more complex, these actions now often include
extensive delay claims and require extensive production of documents and examinations
for discovery and the need to issue Third Party claims against the consultant or
subcontractors. Currently these steps cannot be taken as of right in a lien action. The
Act requires leave for production, examinations for discovery and to issue Third Party
claims and appeals from interlocutory orders are prohibited under the Act.

In practice, lien actions become lengthy, protracted and are further complicated by the
need to bring motions for steps which would otherwise be mandated in non-lien actions.

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In recognition of the above noted issues faced with construction lien litigation, Reynolds
and Vogel have recommended the following amendments:
- Eliminate the need to seek leave to bring an interlocutory motion; 45
- Construction lien actions should be case managed; 46
- Eliminate the need to obtain an order for production of documents and

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examinations for discovery; 47
- Eliminate the need to seek leave to issue a Third Party claim; 48
- Eliminate the prohibition of appeals from interlocutory orders, and allow appeals
with leave of a judge of the Divisional Court; 49
- Allow trust claims and lien claims to be joined and proceed as one action; 50
- Allow the reference of liens with a value of $25,000.00 or less to the Small Claims
Court for a determination on the amount owed, liability and allocation of holdback.
It is recommended however that a Superior Court Judge retain jurisdiction; 51 and
- Establish a simplified procedure, similar to what is outlined in Rule 76 of the Rules
of Civil Procedure (limited examinations for discovery and summary trial), within
Act. 52

Dispute Resolution

The standard form of contracts which are often used in the construction industry, such as
the CCDC 2 - 2008, include mechanisms for alternative dispute resolution such as ability
to refer an issue to mediation and/or arbitration while the work is still ongoing. The

45 Ibid at p. 99.
46 Ibid at p. 107.
47 Ibid at p. 100.

48 Ibid.

49 Ibid.

50 Ibid at p. 102.

51 Ibid at p. 113.

52 Ibid.

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unfortunate reality is that the parties to these contracts do not often make use of these
provisions to resolve disputes during the project. In addition, non-standard forms of
contracts often do not include any alternative dispute resolution terms.

One of the obstacles to using the process outlined in contracts such as the CCDC 2 –

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2008 is the fact that the consultant, who is hired by and paid by the owner, is the decision
maker in the first instance. This creates an impression of a lack of impartiality and the
contractor does not feel it will receive a fair assessment of its claim. As a result, the
process is not used.

When disputes arise during the work, proceeding before the courts is not an option due
to the lengthy delays before a resolution is achieved and a court proceeding is not
conducive to ensuring that progress continues on the project while the dispute is winding
its way through the court. In order to address this problem, the Report sets out numerous
recommendations for establishing an adjudication process to be implemented as a
regulation under the Act. 53 The recommendations include, inter alia:
- The establishment an initial pool of adjudicators available in the major centres in
the Province; 54
- Establishing the qualifications of those who would be selected as adjudicators; 55
- The adjudicator would be nominated after a dispute has arisen, not at the
beginning of the project; 56 and
- The parties would maintain their lien rights not withstanding their participation in
an adjudication process. 57

53 Ibid at p. 230.
54 Ibid at p. 233.
55 Ibid.

56 Ibid at p. 235.

57 Ibid at p. 244.

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 Payment terms

As noted above, the standard turnaround in the industry for the payment of invoices is
currently 60 to 90 days. This delay in payment has significant impacts and consequences
for subcontractors and some general contractors.

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In an attempt to address the issues in the construction industry arising from the failure on
the part of owners and general contractors to pay in a prompt manner, Bill 69 – Prompt
Payment Act, 2013 was introduced, however, it was never enacted. Reynolds and Vogel
provide a comprehensive review of Bill 69 in their Report 58.

Although Bill 69 was not enacted, it is recognized that a structure is needed to address
the ongoing issues with payment on construction projects. The Report recommends that
the payment structure be legislated and thereafter implied into all contracts which do not
explicitly include equivalent provisions. 59

The Report sets out a number of recommendations relating to a proposed statutory

regime for the prompt payment of services rendered on a construction project, including,
to whom it should apply within the construction pyramid (all parties from owner down to
supplier60), the ability by the general contractor to defer their payment obligations where
the owner has not delivered payment (with specific procedures to be followed by the
general contractor in such circumstances61), and the necessary steps required to triggers
the obligation to deliver payment. 62

It has also been recommended that the following payment terms be legislated:
- A 28-day payment period between the owner and the general contractor; 63 and

58 Ibid at pp. 153-160.

59 Ibid at p. 192.
60 Ibid at p. 194.

61 Ibid at p. 194.

62 Ibid at p. 196.

63 Ibid at p. 197.

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 - The obligation on the part of the general contractor to pay its subcontractors within
7 days from receipt of payment from the owner. 64

Although these payment terms were recommended, Reynolds and Vogel nevertheless
advocated in their Report that the parties should still be free to negotiate and implement

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payment terms in their contracts. The proposed prompt payment terms therefore would
only apply in cases where no clear payment terms are set out within the contract. 65

The Report also examined the potential and proposed consequences for non-payment.
Two consequences were identified. The first is the imposition of mandatory interest on
late payments. It has been proposed that the rate of interest should be greater than what
is provided in the Courts of Justice Act or the contractual rate of interest. 66

The second recommended consequence for non-payment, is the right of the aggrieved
party to suspend the work. In reviewing whether this remedy should be available,
Reynolds and Vogel recognized the potential for abuse of this consequence by some
contractors/subcontractors, where there is a legitimate dispute on the amount owed, or
where amounts are being legitimately withheld for deficient or incomplete work. In order
to address the risk of the abuse, it was recommended that the right to suspend could only
be enforced once the matter has been adjudicated in accordance with the procedure
outlined in the Report, and the payor fails and/or refuses to deliver payment, in
contravention of the decision rendered by the adjudicator. 67

64 Ibid.
65 Ibid
66 Ibid at pp. 199-200.

67 Ibid.

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Conclusion

It remains to be seen which, if any of the recommendations, will be implemented by the

Province. The Province issued a press release on September 26, 2016 68 wherein it
indicated that it was proposing to introduce legislation in the Spring of 2017 that would be

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based on the main principles found throughout the Report. It is hoped that the Province
will take steps to implement some of the recommendations, especially those which relate
to the extension of time for the preservation and perfection of liens, as well as the ability
to refer liens having a monetary value of $25,000 or less to the Small Claims Court.

For a summary of all the recommendations which have been made for the amendment of
the Construction Lien Act, please go to <http://www.constructionlienactreview.com/wp-
content/uploads/2015/07/CLA-Summary-of-Recommendations.pdf>.

Those wishing to read the entire report can access it online at

<http://www.constructionlienactreview.com/wp-content/uploads/2015/07/Striking-the-
Balance-Expert-Review-of-Ontarios-Construction-Lien-Act.pdf>.

68Ontario Modernizing Construction Laws to Support Industry Growth, online:

<https://news.ontario.ca/mag/en/2016/09/ontario-modernizing-construction-laws-to-support-industry-growth.html>

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