A recent decision by Justice Steele in the Ontario Superior Court of Justice has brought some much-needed clarity for road building contractors seeking to uphold (or overturn) an interim-binding decision of a referee under MTO’s dispute resolution procedures.

Background

In HMQ (Minister of Transportation) v. Bot Construction (Ontario) Limited, a payment dispute arose on an MTO project as a result of additional costs incurred by Bot for excavating, stockpiling, and compacting an unforeseen volume of rock material (the “Claim”).  Bot ultimately submitted the Claim to a referee in accordance with the contract’s dispute resolution procedure, set out in the February 2016 SP100S55 amendment to the contract’s general conditions.

A contractually mandated meeting was held between the parties and the referee. At the referee’s request, the referee received additional submissions and information after the meeting and before rendering a decision requiring MTO to pay Bot the sum of $341,012.70 plus HST for the Claim.  The referee’s decision was provisionally binding on the parties, subject to the right of either party to “review” the decision by filing a notice of protest within 30 days. 

The contractual dispute resolution process set out in SP100S55 does not specify a format or any procedural rules for a review of the referee’s decision.  The contract provides that either party may “resort to litigation” for a review of a referee decision.

MTO Moves to Review (and Reverse) the Referee Decision

MTO commenced an application seeking a declaration from the court that the referee’s decision was wrongly decided and for an order requiring Bot to return to MTO the payment awarded by the referee.  To our knowledge this is the first court challenge of the MTO’s unique referee process and the path to be followed in seeking review of a referee decision under protest.

The grounds advanced by MTO in challenging the referee decision included an allegation that the referee had deviated from the prescribed referee process by allowing reply submissions from Bot in response to written submissions by MTO that differed from those provided in MTO’s original field level decision to deny the claim.  MTO alleged that the referee erred by encouraging further submissions from both parties at the referee meeting.

MTO further alleged that the referee had made an error in interpreting and applying the relevant contractual provisions, particularly with respect to the contractual provisions dealing with increases in the volume of blasted rock material (compared to its pre-excavation volume) after it was placed and compacted in a stockpile by Bot.

MTO sought a review of the referee decision by the court on a summary basis to be restricted to the limited documentary record that was before the referee.  MTO took the position that this initial review of the referee decision could then be challenged a further time by the unsuccessful party with the commencement of a regular court action seeking a final decision at a trial based on a full documentary record.

Faced with the prospect of multiple proceedings to uphold the referee’s decision, Bot moved for an order to convert MTO’s application into a regular action destined for a trial that would provide a single-step to fully and finally resolve the dispute.  Kyle MacLean, a partner with Advocates LLP, argued the motion on behalf of Bot.

The Decision

In her decision on Bot’s motion, Justice Steele reviewed the relevant factors that favour converting an application into an action, which would proceed to a full trial, including the following:

  1. Where there are material facts in dispute;
  2. Where the issues to be determined go beyond the interpretation of a document;
  3. Where there are complex issues and/or credibility determinations that require the court to weigh evidence; and
  4. Where the judge hearing the application cannot make a proper determination of the issues on the documentary record.

Justice Steele then reviewed the record before the court on MTO’s application and noted that there was conflicting evidence on the central issue of how the excavated rock volume changed based on Bot’s handling and compacting operations.  Resolving the contradictory evidence on this type of issue could not be done by a review of the contract documents and would likely require evidence from the road building industry and/or experts.

Another factor in favour of reviewing the referee decision by an action leading to a full trial was the lack of a complete record of the referee proceedings.  There was no transcript or other record of the referee’s meeting with the parties, resulting in an incomplete record of the evidence considered, which prevented the court from making a proper determination of the issues on the application.

Finally, Justice Steele observed that reviewing the referee decision on an interim basis by way of an application was not required under the contract’s dispute resolution provisions.  To do so would add an additional step that would only increase the cost and time of all parties on their way to a final resolution.  Converting the application into an action and sending it to trial in the normal manner would permit the court to finally resolve the dispute on its merits.

For these reasons, Justice Steele ordered that MTO’s application to review the referee decision must proceed by way of an action. As the party challenging the referee decision, MTO would be the plaintiff and Bot the defendant. The provisionally binding decision and resulting payment that MTO had to make under order of the referee would stand until such time as a trial judge ruled that the payment need not have been made, or otherwise determined that Bot was entitled to keep the award of the referee.

Implications for Industry

This decision provides procedural clarity for road building contractors who are seeking to review (or uphold) a referee’s interim binding decision.  The lack of a complete evidentiary record for referee proceedings, when paired with the complex factual issues that are often encountered on MTO project disputes, will generally favour proceeding by way of an action for a final determination of the claim. Doing so will ensure that a contractor can secure the quickest and most cost-effective resolution of their dispute with MTO.

Advocates LLP acts frequently for general contractors encountering problems on their ICI and infrastructure projects around Ontario, including those under contract with MTO, Metrolinx, Infrastructure Ontario, and local Municipalities. We have extensive experience working with clients to assist them in preparing for and managing the MTO referee process. Contact any one of our partners or visit us at AdvocatesLLP.com , and we would be pleased to assist.

Marcia Oliver will be at the Advocates’ Society Education Centre to speak at new a program entitled “Construction Law:  Lien and Arbitration Advocacy” to be held in Toronto, Ontario on April 21, 2017.

Topics include:

For more information or to register see the Advocates’ Society page.

Jim LeBer, Kyle MacLean and Eric Grigg will be leading a day-long training session for the Ontario Road Builders Association, at their annual Road Builder Academy in Toronto on February 27, 2017. Jim and Eric will be teaching on the topic of MTO’s New Dispute Resolution Process, including the use of the Referee procedures now in place.

The firm’s lawyers led this same session last year in advance of the MTO’s roll-out of these new Issue Resolution procedures.

Jim LeBer spoke in Markham on January 12, 2017 to a group of engineers and architects at the XL Catlin Insurance – Seminar: Loss Prevention Through Better Communication.  The session was well attended by approximately 100 professionals. Jim spoke on the topic of Regional Claims and the Lessons Learned.

On October 6, 2016, Angelo D’Ascanio will be co-chairing, and Kyle MacLean will be be speaking at, a joint Ontario Bar Association and Middlesex Law Association continuing professional development program titled “What’s Trending in Commercial Litigation?”.  Kyle will be reviewing potential changes to the Construction Lien Act as a result of Ontario’s recently published expert review report.

For more details see the program agenda on the Middlesex Law Association’s website.

 

Marcia Oliver will be at the Ontario Bar Association Young Lawyers Division’s conference “Expert Advice on Launching Your Legal Career: I Have My  Law Degree, Now What?” to be held in London, Ontario on August 30, 2016.  Marcia is chairing a panel discussion on life after articling and touching on topics including opening a practice, in-house legal work and alternative careers for lawyers.

For more information or to register see the LSUC page.

The decision of the Ontario Superior Court in Robert Nicholson Construction Co. v. Edgecon Construction Inc. underscores the importance of ensuring that payments by owners and contractors to their subcontractors or suppliers are made in compliance with the trust provisions of the Construction Lien Act. Payments made to a third party outside of the construction “pyramid”, even when done in good faith and at the request of the intended recipients, can leave owners and contractors (and their directors/officers) liable for an unintended breach of the CLA trust provisions.

Background

The defendant Owners were developers of a retirement residence in Stratford, Ontario (the “Project”). The Owners entered into a construction agreement for the Project with a company called Edgecon Contracting Corp. (“Contracting”). E. Contracting entered into various subcontracts including subcontracts with two entities: Edgecon Construction Inc. (“Construction”) and a numbered company, 1809313 Ontario Inc. (“180″). The Owners dealt with both E. Construction and E. Contracting as their General Contractor for the Project.

E. Construction entered into a subcontract with the plaintiff, Nicholson. Unknown to Nicholson, the principal of E. Construction, Mr. Enzo Mizzi, also operated E. Contracting (the contracting party with the Owners) and 180.

During completion of the Project, the Owners and the General Contractor agreed, at Mr. Mizzi’s request, to pay an advance of approximately $1.8 million to 180, which had no contractual involvement in the Project. The amount paid to 180 included monies owing to Nicholson which went unpaid after Nicholson’s subcontract work was complete. 180 made payments to subcontractors to the Project but not to Nicholson.

Nicholson sued E. Construction and the Owners. Nicholson then moved for summary judgment against the Owners for breach of the trust provisions of the CLA.

Decision of the Ontario Superior Court of Justice

Nicholson argued that the Owners’ payments to 180 did not discharge the Owners’ statutory trust obligations under the CLA.

The Owners denied liability on the basis that they had paid all certified amounts to their contractual General Contractor, E. Contracting. The Owners also argued that the CLA creates separate trust relationships between: owner and contractor; contractor and subcontractor; and subcontractor and its subcontracts/suppliers. The Owners asserted that, as a result of Nicholson’s position in the construction “pyramid” as a sub-subcontactor, it had no legal standing to enforce the Owners’ trust obligations owed E. Contracting.

A significant component of the CLA is the creation of a statutory trust scheme. Owners, contractors and subcontractors are deemed to be trustees for all monies owing to other parties lower in the construction chain or pyramid. As the motions judge noted, an owner, as trustee for funds owing to the contractual general contractor, can discharge its trust obligations by complying with s. 10 of the CLA:

Once an owner pays the contractor all amounts certified by a payment certifier (less statutory holdbacks), the owner is absolved from any further liability in this regard. The wording of s. 10 makes this perfectly clear. It provides that (subject to holdbacks) once a payment is made by a trustee (here the Owner) to a person who has supplied services or materials to the improvement of a property (here the Contractor), such payment discharges the trust of the trustee (Owner). Importantly, the section then adds such discharge is as against “all beneficiaries of the trust to the extent of the payment made by the trustee”.

In rejecting the Owners’ arguments, the motions judge found that the use of the word “beneficiaries” in the CLA trust provisions was determinative:

[beneficiaries] denotes an intent by the legislature to say, in effect, “if you as a trustee (whether owner, contractor or subcontractor) make a payment to the party to whom you are in privity of contract, you are exempt from liability with respect to all other parties lower down the construction chain with whom you have no privity of contract.

The motions judge held that by agreeing to Mr. Mizzi’s request to pay 180 the funds properly payable to the contractual General Contractor, E. Contracting, the Owners had failed to make payment to a deemed beneficiary of the construction trust funds and in accordance with the trust provisions of the CLA.

The motions judge considered the underlying intention of the Owners in making the payment to 180 but concluded that intention was irrelevant for determining compliance with the CLA trust provisions:

While the Owners’ intentions may have been bona fides, made in good faith and even done in the expectation or intention of subcontractors getting paid sooner, such payment was made at their peril, and, most importantly, legally outside the scope and protection of the CLA.

The motions judge found that the Owners had breached their statutory trust obligations under the CLA and granted summary judgment in favour of Nicholson for its unpaid subcontract balance.

Discussion

There are several useful lessons to be learned from this decision. Of note, this decision confirms that the underlying intent for an extra-contractual payment is irrelevant for determining whether a party has discharged its CLA trust obligations. As the motions judge noted:

What may be a legitimate, bona fide business reason for an owner to make an extra-contractual payment in one situation might be an act done to perpetrate a fraud or otherwise avoid the enforceability of a construction agreement in another.

All paying parties in the construction “pyramid” must take precautions to ensure that payments are made to parties with whom they have a direct contractual relationship. Payments to non-contractual parties, even where such payments are requested by the downstream contractual parties to facilitate payments, should be avoided unless proper precautions can be taken to ensure a complete discharge of the payor’s CLA trust obligations.

Ensuring a complete discharge of trust obligations is required to avoid obligations by a paying party to all downstream parties in the construction pyramid. This decision confirms that an owner or general contractor will be liable to a subcontractor, sub-subcontractor (or any other downstream party) if payments are not made in strict compliance with the CLA trust provisions.