Brendan Bowles, Partner and Markus Rotterdam, Director of Research
A recent Divisional Court decision, 9585800 Canada Inc. v. JP Gravel Construction 2019 ONSC 7022 has eliminated confusion in one area of Ontario lien law. Unfortunately, respectfully, in doing so it may have created confusion elsewhere.
In the Summer 2019 issue of this newsletter, we commented on the Superior Court decision in 9585800 Canada Inc. v. JP Gravel Construction 2019 ONSC 3396, which we respectfully submitted was wrongly decided. The case arose from a common but misguided practice: an attempt by a lien claimant to “self-correct” an error in a registered claim for lien by registering a discharge of the erroneous lien and then registering a second, corrected form of lien. In JP Gravel, the lien claimant registered a lien in the amount of $662,100.48, discovered the time period claimed for the supply of services and materials was incorrect and then proceeded to discharge that lien and registered a second lien for the same amount and using substantially the same information as contained in the earlier lien, but correcting the time period claimed for the supply of services and materials. We argued that those facts brought the case squarely within the binding precedent of Southridge Construction Group Inc. v. 667293 Ontario (1992), 2 C.L.R. (2d) 177, aff’d (1993), 2 C.L.R. (2d) 184 (Div. Ct.) and the numerous cases that followed it, which held that once a lien is discharged, a claimant cannot lien again for services performed prior to the date of the perfection of the first, discharged lien. In our view, the form of self-correction used in JP Gravel was in fact fatal to the lien.
However, the lower court distinguished Southridge on the basis that the error in Southridge concerned the amount of the lien, while the error in JP Gravel concerned the date for the supply. The fact that the claimant in JP Gravel had used the wrong timeframe was held to have turned the lien into a “nullity”. We were critical of this conclusion as it disregarded section 6 of the Construction Act and the case law interpreting this section. Far from being a nullity, in our respectful opinion, the error in time frame was an error of form, not substance, that in the absence of prejudice did not invalidate the claim for lien.
A simple thought experiment would demonstrate the inadvertent danger in concluding that such errors rendered a claim for lien a nullity: what if the error in JP Gravel was not discovered within the strict time periods to preserve and perfect the claim for lien? This would mean that the claim for lien would never have been preserved at all since a nullity cannot satisfy a legal requirement. Even in the absence of prejudice the Court’s hands would be tied in ruling that the lien was not invalidated by virtue of section 6, since a nullity is by definition invalid. In short, we were concerned that in trying to “do right” by the lien claimant in JP Gravel, the Court may have inadvertently created jeopardy for other lien claimants whose liens contain similar errors of form but may have been invalidated as “nullities”, instead of liens that could be saved by section 6.
The Divisional Court has now overturned the lower court decision in JP Gravel, finding that the wording of section 48 of the Construction Act is clear that once a lien is discharged, that discharge is irrevocable, and the discharged lien cannot be revived by the registration of another lien. This affirms well-understood law and removes any doubt; lawyers should not use a discharge of lien as a means to correct a registration error. The correct course is to register a second claim for lien with the correct information and to consent to an order vacating the first registered claim for lien. The distinction between vacating a claim for lien (which merely removes the instrument from title while preserving the remedy) and discharging a claim for lien, which extinguishes the lien remedy, remains alive and well. Moreover, the potential for liens containing errors of substance not form being considered nullities instead of liens capable of being saved under section 6 in the absence of prejudice, has been avoided.
The loss of the lien remedy altogether where the discharge is inadvertent may seem harsh, but the reason for the distinction is of fundamental importance. A claim for lien is an a legal action in rem which can affect the rights and remedies of third parties in respect of land or money. A discharge is meant to be an unambiguous signal to the world at large that the lien has been irrevocably extinguished, thereby allowing other parties to govern themselves accordingly without having to conduct further inquiries to determine whether the discharge is in fact final.
While the Divisional Court’s conclusion on the discharge issue in JP Gravel is no doubt correct, we respectfully submit that the Divisional Court may have erred in hearing the appeal in the first place. It is well-settled law that an unsuccessful motion to discharge a lien is interlocutory in nature. Since this case was governed by the former Construction Lien Act, there was no appeal from interlocutory orders.
The Divisional Court relied on a number of decisions for its finding that the order below was final:
The formal order states in paragraph 1 that the motion is dismissed. However, paragraph 2 of the order states that the second lien is valid and shall remain in place. Paragraph 2 is a final order, as it settles the validity of the lien that was registered on June 4, 2018 and deprives Gravel of a substantive defence at trial (see HMI Construction Inc. v. Index Energy Mills Road Corporation, 2017 ONSC 4075 (CanLII) (Div. Ct.) at para. 12; Stubbe’s Precast Commercial Ltd. v. King & Columbia Inc., 2018 ONSC 3062 (CanLII) (Div. Ct.) at para. 12; 570 South Service Road Inc. v. Lawrence-Paine & Associates Ltd., 2011 ONSC 3410 (Div. Ct.) at para. 13).
It is apparent that the wording of the formal order under appeal was important to the Divisional court’s disposition of this issue and correctly so, since, as affirmed in 570 South Service, it is the court’s formal order which is subject to an appeal, not the court’s reasons for decision. Arguably the lower court’s formal order that “the second lien is valid and shall remain in place” is a final disposition of that issue that cannot be re-examined at trial and as such is final and subject to appeal.
However, with respect, the case law relied on by the Divisional Court in reaching this conclusion does not support this conclusion. HMI Construction stands for the proposition that an order reducing security posted in court to vacate a lien is a final order. Justice Corbett held that “an order under s.44(2) reducing the amount of security to be posted for a lien is a final order in that it determines, on a final basis, the maximum amount of the lien claim.” That decision does not stand for the proposition that an unsuccessful motion to discharge a lien is final.
The next case relied on by the Divisional Court, Stubbe’s Precast, does stand for that proposition, but it was reversed by a panel of the Divisional Court on appeal on this very point. At paragraph 14 of the appeal decision at 2018 ONSC 6539, the court clearly states that “[i]n our view, the motions judge erred in concluding that the order of Flynn J. was a final order”. Presumably, the Divisional Court hearing JP Gravel was not made aware that a decision it was relying on had been reversed.
The last case cited by the Divisional Court, 570 South Service Road, also seems to stand for the exact opposite proposition it was cited for by the Divisional Court:
The order as issued and entered by the court simply says "the motion by 570 South Service Road is dismissed". It is that order which is before us on this appeal, and it is not a final order that settles for all time the validity of the Claim for Lien.
It is therefore somewhat surprising that the Divisional Court in 9585800 Canada Inc. v. JP Gravel Construction relied on this case law to arrive at the conclusion that the order appealed from was final. It would have been preferable had the Divisional Court explicitly distinguished the cases it cited from the terms of the formal order made by the lower court in JP Gravel, and we respectfully submit that for future cases considering the distinction between a final and interlocutory order that JP Gravel should be considered as turning on its key fact: the lower court judge’s finding on the validity of the lien in JP Gravel was expressly and finally made in the formal court order and not just stated in the reasons for decision as a reason to dismiss the motion. Put another way, the best reading of JP Gravel may be that an order dismissing a motion to discharge a lien is interlocutory, but if the Court goes one step further and orders the claim for lien to be valid, it is this latter part of the order that is final and therefore subject to full appeal rights under either the Construction Lien Act or the Construction Act.
Given that we agree with the Divisional Court’s disposition as to the effect of a discharge, one could question why we are choosing to criticize the court’s handling of this jurisdictional point. After all, given the Construction Act has relaxed the rule prohibiting appeals from interlocutory orders for matters arising from contracts procured or entered into on or after July 1, 2018, does the interlocutory or final distinction still matter? Can this aspect of the Divisional Court’s decision in JP Gravel essentially be regarded as potentially flawed, but of no significance beyond the immediate parties? We are of the contrary view: appeals from interlocutory orders are permitted by the Construction Act with leave. As such, the distinction between final and interlocutory orders still matters and this aspect of JP Gravel will therefore bear close scrutiny by future courts.
The transition provisions of the Construction Act are gradual. For the next few years there will still be many lien matters before the Court arising from contracts procured or entered into before July 1, 2018 and therefore subject to the Construction Lien Act’s prohibition on interlocutory appeals. The point is far from moot in those cases.
For cases that fall under the new Construction Act regime where appeals from interlocutory orders are allowed with leave, it is arguably more important, not less, if the Court is to properly fulfill its gatekeeper function, that the distinction between interlocutory and final orders be well understood and maintained. No doubt, if the Divisional Court decision in JP Gravel stands, it will be used by unsuccessful parties moving for a discharge order to seek an appeal as of right and skip the step of seeking leave. With the greatest of respect, it appears that in affirming Southridge and the irrevocable nature of a discharge, the Divisional Court may have introduced uncertainty into whether an unsuccessful motion to discharge a claim for lien is final or interlocutory. We can anticipate that it will be for a future court to re-examine this issue given that the distinction between interlocutory and final orders remains fundamental to an appeal in an action under the Construction Act.