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Legal Notes: Court allows lien security reduction for partial payments made to subcontractors

John Bleasby
Legal Notes: Court allows lien security reduction for partial payments made to subcontractors

Aurelia Limited Partnership and Oakleigh Holdings Inc. thought they had done the right thing. A lien had been placed on their condominium project in downtown Orillia, Ont. by their construction manager, Demikon Construction Ltd., in the amount of just over $5 million. Aurelia/Oakleigh followed by posting security with the court in that amount.

Over the course of 13 months, including a few weeks prior to the registration of Demikon’s lien, Aurelia/Oakleigh made direct payments to many of Demikon’s subcontractors, totalling just over $4.2 million including holdbacks.

Although the matter between the two parties had not been heard in court, Aurelia/Oakleigh put forward a motion, pursuant to section 44(5) of the Construction Lien Act, requesting the court reduce the lien security to about $1.5 million, once all payments paid to Demikon’s subcontractors were taken into account. They believed this was allowed under section 28 of the Ontario Construction Act.

However, Demikon felt otherwise. Since the matter of their overall dispute with Aurelia/Oakleigh had not yet been resolved, it viewed any security reduction as a “summary judgment motion” and not a lien trial. Demikon also maintained the full amount of the security should remain because the subcontractors were not “lien claimants.”

Demikon went even further, suggesting the information Aurelia/Oakleigh provided was “convoluted.” They said they could not follow the logic or process of Aurelia/Oakleigh’s analysis.

Court Justice John McCarthy spared little in his assessment of Demikon’s arguments. Over the course of several hundred words, he took Demikon to task.

“With the greatest respect, I find that the plaintiff seeks to overcomplicate what should really be a straightforward, summary exercise,” he wrote. “The entire act makes it abundantly clear that the section was meant to encompass the very types of payments made in the case at bar.”

Aurelia/Oakleigh were project owners and made direct payments to the subcontractors “without an obligation to do so,” he continued.

“I see no reason why payments made under s.28 would not factor into the court’s summary exercise. Indeed, how could they not? Common sense, fairness, simple accounting, commercial reality, the mechanics of security and the entire scheme and purpose of the act would all be perverted if direct subcontractor payments were not central to the court’s analysis of a security reduction motion.”

The mixed-used Matchedash Lofts development occupies a full downtown block in the mid-Ontario city of Orillia.
JOHN BLEASBY — The mixed-used Matchedash Lofts development occupies a full downtown block in the mid-Ontario city of Orillia.

Justice McCarthy had no doubts about the veracity of the payments made and claimed by Aurelia/Oakleigh.

“The details are painstakingly set out in their materials. There is no reason to doubt the accuracy and reliability of that evidence,” he wrote.

“Contrary to plaintiff counsel’s assertion, the information is not at all convoluted. It is necessarily dense and extensive given that it incorporates dozens of subcontractors, hundreds of invoices, countless back up documents spanning more than a year and involves millions of dollars of payments. I found it to be highly professional, comprehensive, accurate and instructive.”

Justice McCarthy was confident that Aurelia/Oakleigh had put “their best foot forward.” In contrast, he had strong words for Demikon, saying, “The same cannot be said of the plaintiff.”

He noted Demikon failed to provide any evidence the direct subcontractor payments were not, in fact, made. They did not challenge the defendants’ calculations or the methodology in any meaningful way.

Furthermore, Demikon did not offer a countervailing, up-to-date version of its own lien accounting for the court to consider. Absent were any credits for the direct subcontractor payments made since the original lien accounting, despite Demikon having conceded as much in a previous sworn affidavit. 

In summary, Justice McCarthy concluded Demikon, “failed to establish a reasonable basis for the $5,035,812.66 claim for lien it advances.”

“I cannot think of a more unfair result than to have the defendants avail themselves of the direct payment provisions in s.28 on the one hand, only to be denied accompanying relief under s.44(5).”

Aurelia/Oakleigh’s motion was allowed and the lien security reduced to $1,581,587.83, along with an accompanying order.

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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