A construction lien action has more restrictive rules on joinder of claims than ordinary civil actions

Direction to pay subcontractor that is not delivered is not enforceable

Sub-subcontractor’s action against contractor for failure to honour subcontractor’s direction to pay sub-subcontractor – Must be delivered to be enforceable – Where subcontract requires prior written consent to assignment of right to receive payment, failure to obtain consent renders direction to pay unenforceable

Amherst Concrete Pumping Ltd. v. Eastern Construction Co.

Background

In 2002 and early 2003, Amherst Concrete Pumping and a related company Amherst Crane Rentals Limited (collectively “Amherst”) were subcontractors to D.M.S. Concrete Forming Inc. (“DMS”), who in turn was a subcontractor to the general contractor Eastern Construction Co. (“Eastern”) building a project for George Brown College at the Casa Loma campus in Toronto.

DMS ran into financial difficulties, and Amherst took prompt steps to ensure it got paid the roughly $175,000 it was owed.

First, on March 3, 2003, it obtained from DMS an irrevocable Letter of Direction that directed Eastern to make payment directly to Amherst. Amherst claimed, and Eastern denied, that it sent the Letter of Direction to Eastern on March 4, 2003. (Ultimately, it was Master Sandler’s judgment on this factual issue that determined the case.)

As well, in mid-April, Amherst liened the project, and commenced a construction lien action.

It is not uncommon when a contractor or subcontractor defaults that there are many lien claimants, and the holdback is insufficient to provide full, or even satisfactory, compensation. That was certainly the case here. Eastern’s holdback against DMS was a minimum of $75,000 and arguably $117,000. The liens of DMS’s subcontractors and suppliers greatly exceeded that amount:

Amherst – $210,300;
Skyway Canada – $48,130;
National Concrete – $5,280;
Union Local 506 – $13,287; and
Union Local 27 – $97,100

Under the Construction Lien Act, union liens have priority over other lien claimants. In this case, the two union liens exceeded the admitted holdback of $75,000.

Even worse, before the lien actions were tried, Eastern received a Requirement to Pay from the Canada Revenue Agency (the “CRA”) that demanded Eastern pay it any money owing to DMS. (In 1994, the Supreme Court of Canada held in TransGas Ltd. v. Mid-Plains Contractors Ltd. that the CRA’s Requirement to Pay trumped lien claimants’ holdback rights.)

The lien actions, being a lost cause, were settled on the basis that Eastern paid the CRA $20,000, Union Local 506 $6,764 and Union Local $48,441. The other liens, including Amherst’s were discharged.

This Action

Amherst also brought a non-lien action against Eastern in tandem with its lien action. This second action was based on the March 3, 2003 irrevocable Letter of Direction DMS had given it.

Later that month, Eastern paid DMS $49,280. In essence, Amherst claimed that Eastern should have complied with the irrevocable Letter of Direction, and paid that money to Amherst.

Eastern denied any such obligation, and raised three main defences, one factual, one contractual, and one based on general legal doctrines:

it had not received the irrevocable Letter of Direction when it paid DMS the $49,280;
the irrevocable Letter of Direction was unenforceable, because Eastern’s subcontract with DMS required Eastern’s prior consent to any assignment of monies payable; and
finally, Amherst’s lien action had been dismissed – therefore Eastern’s liability to Amherst had already been decided in Eastern’s favour. This action was an attempt to relitigate an issue that had already been decided, and thus was an abuse of process.

The Factual Issue

Master Sandler addressed the factual issue first. It was quite simple. Amherst said that it faxed the Letter of Direction to Eastern on March 4, 2003. Eastern said that it never received it. The question should have been easy to determine, as fax machines are capable of recording and printing records of all transmissions and whether they were received.

Amherst’s vice-president, who testified that she faxed the Letter of Direction, conceded that:

she didn’t keep any records (journals) of the transmission, from Amherst’s fax machine;
she did not have a fax confirmation sheet, because the machine does not print one out;
while the machine does keep, and print out when its memory is full, a ‘journal’ of faxes sent – she did not retain this as proof of fax delivery;
she just “watched” the machine process the fax.

Master Sandler evaluated her conduct thus:

She did not use “prudence” about any fax records, as law offices do, to be able to prove the date and time, and to whom, this fax was sent.

Amherst’s vice-president testified, however, that she did make a note of the number she faxed the Letter of Direction to: “905-642-7014.” She never verified that this was an Eastern fax number. Eastern’s actual fax numbers were “416-497-7241” and “416-324-9525.”

As it turned out, she appears to have faxed the Letter of Direction to a Stouffville chiropractic clinic.

On this evidence, Master Sandler had no difficulty concluding that Amherst had not in fact delivered the Letter of Direction to Eastern. This alone was sufficient to dismiss Amherst’s claim.

However, in light of the possibility of appeal, Master Sandler went on to consider the validity of Eastern’s other defences.

The Contract Issue

Eastern argued that, even if it had received the Letter of Direction, it was not bound to follow it. Article 6 of Eastern’s subcontract with DMS said:

… monies due hereunder shall not be assignable without the prior written consent of [Eastern], and any such assignment without the prior written consent shall vest no right in the assignee against [Eastern].

This clause is something more than the typical clause requiring consent to the assignment of a contract or subcontract. It specifically addresses the circumstances that apply here.

There was no evidence to suggest that Eastern had consented to the Letter of Direction. Master Sandler concluded: “lack of prior consent to the assignment is fatal to Amherst(s)’s claim.”

The Defence of Abuse of Process

Master Sandler concluded that Amherst’s action was not an abuse of process; it was not an improper attempt to relitigate a claim that had been determined in the construction lien proceedings.

He carefully reviewed what had happened in the construction lien proceedings, and observed that Amherst did not in fact assert a claim for breach of the Letter of Direction in the construction lien proceedings, and it was doubtful that even if it had, such a claim could properly be advanced in a construction lien action, which has more restrictive rules on joinder of claims than ordinary civil actions.

Nevertheless, because Eastern’s first two defences were justified, Amherst’s action was dismissed.

Ontario Superior Court of Justice
Master Sandler
February 1, 2008