PREDICTING LIENABILITY:
The Ontario Court of Appeal decision in Kennedy Electric

Charles G.T. Wiebe

It is safe to say that the mechanical and electrical trade associations have been waiting with bated breath for the Court of Appeal decision in Kennedy Electric Limited v. Dana Canada Corporation, hoping for a restatement of the legal principles that determine whether their work constitutes a “supply of services to an improvement.” under the Construction Lien Act. The decision was released on September 27, 2007 and, while it contained some analysis of the principles (perhaps in obiter), the decision stressed more the factual basis of the exercise. Therefore, the decision may have disappointed some.

The facts of the case are familiar. Dana had a contract with Ford to build frames for a line of pickup trucks. Dana owned a property in St. Mary’s, Ontario and arranged under one contract to build a building addition there for the assembly line that would be used to build the truck frames. Dana entered into a separate contract with Rumble Automation to have Rumble design, build and install the assembly line. Rumble designed, built and tested the assembly line at its sites in Oakville and Mississauga, and then disassembled and transported the line in pieces to Dana’s building in St. Mary’s. Part of Rumble’s work was subcontracted to Kennedy Electric. Kennedy’s responsibility was to disassemble the line, transport it to St. Mary’s and install it in Dana’s building.

The assembly line was massive and complex. There were 100 mezzanine platforms and 165 robots. The line was attached to the floor with some 2,000 to 3,000 mechanical and chemical bolts ranging from one-quarter inch to three-eights of an inch wide and from six to eight inches in length. The line covered about 100,000 square feet and weighed about 500,000 tons. It took Kennedy 2 ½ months with 165 trucks to disassemble, transport and reassemble the line. Kennedy was not paid and registered a lien against Dana’s property. By the time of the Court of Appeal hearing Rumble was bankrupt.

The trial judge made several findings of fact. He found that Kennedy was not involved in the connection of the line to any building services. He found that the line could be readily disconnected from the building without damaging the building. Finally, he found that Dana had previously moved some of its assembly lines from one plant to another. The Court concluded that the line was “portable” and that its installation was neither an integrated construction project within the building nor was it a free-standing improvement on its own.

Kennedy appealed to the Divisional Court where the majority agreed with the trial judge, dismissing the appeal. The majority adopted a “functionality test” whereas Justice Chapnik in dissent adopted a “reasonable person” test. O’Driscoll J., speaking for the majority, referenced a line of Ontario cases that indicated that the issue turned on whether the work in question was associated with the functioning of the building itself as opposed to the functioning of the business within the building.

Chapnik J. dissented. She criticized the reasons below for giving undue weight to the “alleged portability” of the assembly line. In her view the issue was more one of whether a reasonable person would consider whether the premises had been improved by the installation of the assembly line. In that context, according to Justice Chapnik, other factors had to be considered: the intentions of the parties, the purpose of the building (ie. whether it was designed to house the assembly line), the intended permanence of the assembly line, the cost of the assembly line as opposed to the building, and the proximity in time between the building construction project and the assembly construction project. When these factors were considered, according to Justice Chapnik, the assembly line installation could be viewed by a reasonable person as being integrated with the building project and therefore an “improvement.”

Kennedy appealed to the Court of Appeal urging the Court to adopt the broader analysis of Justice Chapnik which focused on the intentions of the parties. In particular, Kennedy argued that the Court should adopt the following factors: whether the installation was an “integral part” of the building’s systems or components regardless of its portability; whether the installation was done with “some idea of permanency;” whether the installation was intended to remain in place so long as it could be used for its intended purpose or was economically viable; whether the installation was connected to the properties’ utilities; whether the installation could be removed as a unit or in parts; whether disassembling the installation was difficult; and whether the building was especially designed for the item in question.

The Court of Appeal found it unnecessary to express any clear rule or principle in the circumstances of the case. The Court of Appeal gave deference to the trial judge’s finding of “portability” as a finding of fact. As there was evidence to support that finding of fact, the Court said that an appellate court should not interfere with it. The Court then concluded that it was open for the trial judge to conclude that the installation of the assembly line was not lienable in light of his finding of portability. The Court went on to state that the issue of what constituted an “improvement” was primarily a finding of fact for determination of the trial judge and that different judges could reach different conclusions on this issue as a result.

In what appears to be obiter, the Court did make the following statement:

In most cases, the installation or repair of machinery used in a business operated in a building, particularly where the machinery is portable, will not give rise to lien rights under the CLA. On the other hand, where machinery is installed in a building for the use of a business and is completely and permanently integrated into the building, a lien claim will arise. (emphasis added)

While perhaps not strictly an authoritative pronouncement, this statement appears to signal the thinking of the Court concerning equipment installation cases and is therefore worth exploring. Arguably the Court has in this statement signaled that the legal principle that should guide a court in its fact-finding exercise is the following: the machinery has to be “completely and permanently integrated into the building” to be an improvement.

There appear to be two concepts in this statement. The first is the concept of “integration.” The Court did not define this term, but it was explored by another court in a decision that was quoted at some length by both the Divisional Court and the Court of Appeal, namely the decision of County Court Judge Boyle in the1995 British Columbia case of Spears Sales & Services Ltd. v. Westpine Fisheries Ltd. Here the issue was whether the installation of a pumping system into a fish packing plant gave rise to lien rights. The part of his decision that was quoted by the Ontario Divisional Court and Court of Appeal is the following:

Did the pumps become part of the realty? They may have so been intended as between lessor and this lessee but that is not determinative.

Based in considerable part upon the affidavit filed on behalf of Westpine, my original focus was upon the use of the building and the function of the business in the building. That function has been primarily fish packing. The pumping system is an integral part of that function.

But the question must be answered by looking not to the parties. The question is: are the pumps an integral part of the function of the building? The question does not concern the function of the business it houses (although buildings and improvements may function in specific ways to suit a business). The question because of its statutory basis must be answered in strict terms.

In this light this pumping system is not an improvement. Judgment accordingly (emphasis added)

This quotation suggests a strict, objective functional test for whether a machine was “integrated” into the building. Judge Boyle expressly stated that, being a statutory remedy, the interpretation had to be “in strict terms.” He went on to state that the test had to be an objective one, namely not one necessarily determined by the intentions of the parties. Finally, he stated that the test concerning the lienability of the machinery installation was a functional one, namely whether the machinery became “an integral part of the function of the building.”

We suggest that this is the thinking of the Court of Appeal as well when it used the word “integrated.” The Court quoted the strict interpretation requirement from the 1960 case of Ace Lumber Ltd. v. Clarkson Co. Ltd. The Court did not accept Kennedy’s submission that the test outlined by Justice Chapnik (which focused more on the intentions of the parties) was essential to the definition of “improvement.” Finally, the Court dismissed the submission from Kennedy subcontractor, Cassidy, that the building addition had no value or use other than to serve the assembly line. The Court viewed the building addition as having an independent set of functions that had their own value. It is only a natural conclusion from this that the question of lienability turns on whether and the extent to which the machine in question serves this independent building function.

The second concept in the Court’s above-noted statement is this one: “completely and permanently integrated” (emphasis added). The Court here appears to be stating that a machine that is otherwise serving the building function needs to pass another test in order to be considered to be a part of the improvement. This additional hurdle appears to tie in to the concept of “portability” that the Court expressly endorsed as a factor in determining lienability. The Court stated at one point that an installation that “is moveable (ie. portable) and not an integral part of the building” will not give rise to lien rights.

What is significant about the decision on the issue of “portability” is that the Court appears to have focused on the findings of fact of the trial judge concerning whether the assembly line could be moved at all without damaging the structure and whether other assembly lines had been moved in the past in other situations. The other facts that Kennedy focused on in its argument (namely the cost and inconvenience of moving the line and the intentions of the parties) did not, in the Court’s view, create a reviewable error by the trial judge. This suggests that the Court views the issue of portability as a strictly objective test of whether the machine can be and has been moved and used elsewhere without damaging the building.

What we are left with then concerning the Court’s obiter statement is a concept of lienability that may effect some movement in the law of lienability. Arguably the concept of “integration” is consistent with the line of Ontario cases stemming from Hubert v. Shinder which requires that a lienable machine must primarily serve a building function. Such building functions would appear to be those that pertain to every building – structure, heating, air flow, lighting, plumbing, etc. What may be a departure is the concept of the machine being “completely and permanently” integrated into the building. A machine that is otherwise integrated into a building and its functions may still not be lienable if it can be removed and used elsewhere without damaging the building. One wonders for instance whether the 1988 Ontario case of Stacey Heating & Plumbing Supplies Ltd. v. Tamasi would now be decided differently. That case held that the installation of air conditioning machines was lienable.

In short then, the Court of Appeal in the Kennedy Electric decision has arguably provided some guidance to the definition of “improvement” under the Construction Lien Act, even though the guidance may be oblique. The Court has clearly held that the exercise of determining lienability is a fact driven process in which portability and integration are key factors. The Court also appears to have affirmed a strict objective functional test of lienability. In this regard, the decision is arguably in line with the bulk of the case authority. What may be an added dimension though, namely the idea of “complete and permanent” integration, will have to be worked out by the courts in future cases.

Shortcut to: http://www.ontariocourts.on.ca/decisions/2007/september/2007ONCA0664.pdf