It is trite lien law that a subcontractor’s rectification of deficient or improper work does not extend the time for preserving the subcontractor’s lien under the Construction Lien Act (the “CLA”). This principle was articulated most succinctly in the leading case of Canadian Rogers Eastern Ltd. v. Canadian Glass, 1993 CarswellOnt 833, in which Master Sandler held that:
Doing work or supplying materials to rectify defective or improper workmanship or material […] will not extend the time for filing the claim for lien...
However, a review of the authorities on this point suggests that it is far from clear whether this principle applies to contractors as well. While the CLA suggests that that it should not, some authorities indicate the opposite: namely, in some circumstances, rectification of deficiencies by a contractor (as opposed to a subcontractor) do not in fact extend a contractor’s lien rights. This is an overlooked but potentially important point for a contractor to consider in deciding when to register a construction lien.
The Statutory Basis for Preserving a Lien
The general proposition that rectification work does not extend lien rights for subcontractors arises from a strict interpretation of the CLA. The CLA is “technical legislation” designed to give priority and security to those who supply work and services to real property, and in order to avail oneself of the benefits of the legislation, a person registering a lien must comply strictly with its requirements: Vaughan-Scape Landscape Contractors Inc. v. Watermark Developments Ltd., 2010 ONSC 1365 (S.C.J.) at para. 7. Adhering to the strict requirements means that the statutory provisions on whether a person is entitled to a lien and those provisions creating the lien, such as the sections prescribing the time periods for preserving and perfecting lien rights, are strictly construed: Sesco Ltd. v. Life Centre Non-Profit Housing Corp. (Ajax), 1998 CarswellOnt 291 at para. 21, 37 O.R. (3d) 764 (Div. Ct.).
The CLA has been drafted so that there is a clear distinction between contractors’ liens, provided for in subsection 31(2) of the CLA, and subcontractors’ (and “other persons’”) liens, provided for in subsection 31(3). It is important for a lien claimant to determine which of the two categories they fall under, since the time period by which a lien must be preserved will vary depending on whether the lien is being claimed by a contractor or a subcontractor.
For contractors’ liens, the CLA further distinguishes in section 31(2) between those contractors’ liens for which there is a certification of “substantial performance” of the contract, and those for which there is no such certification. Where a contract has been certified as substantially performed, a contractor’s lien expires 45 days after the earlier of (i) publication of the certificate of substantial performance, or (ii) completion or abandonment of the contract. Where there is no certification of substantial performance, a contractor’s lien expires 45 days after the earlier of (i) completion or (ii) abandonment.
Regardless of whether a certificate of substantial performance has been published, under either branch of section 31(2) a contractor’s 45 day lien preservation period can be triggered and can start to run from the date of the “completion” of the contract. “Completion” is a defined term, set out in subsection 2(3) of the CLA, which provides as follows:
For the purposes of this Act, a contract shall be deemed to be completed and services or materials shall be deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of,
(a) 1 per cent of the contract price; and
Does the existence of “known defects” extend contractors’ lien rights?
Given the definition of “completion” applicable to contractors’ liens in subsection 2(3), where no certificate of substantial performance has been published, does the price of a “correction of a known defect” in the work of the contractor which exceeds the specific amounts in subsection 2(3) extend the lien rights of a contractor?
To illustrate this point, assume that on a $100,000 contract there is a known defect, the correction of which is priced at $5,000. The defect’s price, being greater than the amounts in subsection 2(3), would result in the contract not being deemed “completed”. Only if the price of the known defect were to fall below $1,000 would the 45 day time period in subsection 31(2) begin. As such, in this scenario, the deficiency would have the effect of extending the contractor’s lien rights. This is clearly an outcome at odds with “trite law” and the view that rectification work cannot extend lien rights for subcontractors.
A review of the case law on contractors’ liens shows that courts have walked a tightrope when considering how to reconcile the text of subsection 2(3) of the CLA with the principle that rectification work does not extend lien rights. On one hand, the majority of leading cases dealing with this issue have hewed to the principle set out above in Canadian Rogers Eastern, and have not permitted contractors to extend their lien rights. However, as this is clearly and directly contrary to the express words used in subsection 2(3), the courts have addressed this discrepancy by qualifying the provision, providing judicial interpretation of the statutory text, and laying down new rules which are not obvious from the words of the statute.
One approach to interpreting subsection 2(3) has been “technical”, in that that a court examining the alleged deficiencies would “discount” the value of these deficiencies and assign to them a “correction price” of nil. On this view, a court would start by examining whether the allegedly deficient work was part of the original scope of work. If it was part of the original scope, and was duly performed by the contractor—even if performed badly—then this work would be “completed” work, and the “price” to rectify this deficient work would be deemed to be nil. In other words, the “price” of such deficiency work would not be computed separately from the original scope and would not be worth anything (unless the contractor was permitted under the agreement to charge extra for such work), and would therefore not extend lien rights despite the text of subsection 2(3).
The “discounting” approach to reconciling the “defects do not extend lien rights” principle with subsection 2(3) is illustrated in Micon Interiors General Contractors Inc. v. D’Abbondanza Enterprises Inc., 2008 CarswellOnt 6156 (S.C.J.). In this case the plaintiff, Micon, entered into a contract for renovation work with the defendant company. When Micon delivered its final invoice on August 3, 2005, the work was not complete. In particular, some electrical work on a fan remained outstanding. Micon performed the electrical fan work on January 27, 2006, and registered a lien on March 9, 2006, that is, ostensibly within the required 45 day period. The defendant nevertheless argued that Micon’s lien was registered out of time as the electrical fan work was deficiency work. The defendant accordingly moved for a declaration that the lien was expired.
Justice Gilmore agreed with the defendant, and granted the declaration, for two reasons. First, although Justice Gilmore considered the text of subsection 31(2) and subsection 2(3) of the CLA, he nevertheless followed the principle laid down in Canadian Rogers Eastern regarding subcontractor’s liens and held that since the electrical work on the fan was deficiency work, it could therefore not extend the 45 day lien period for Micon as a contractor. In other words, Justice Gilmore did not initially delve into statutory interpretation, but, as the first step, preferred to apply the blanket rule that rectification work cannot extend lien rights.
Justice Gilmore then went on to consider how subsection 2(3) might apply to contractors’ liens. He went on to opine that even if the general rule in Canadian Rogers Eastern did not apply to contractors, in his view the result would not have changed. Justice Gilmore held that completion had already been achieved, as the “price” of correcting the allegedly deficient electrical work on the fan was $0. This was so because the electrical work was included in the prime contract, and had in fact already been invoiced. As the contractor was not able to charge extra for the correction of the deficient work that was part of the original contract, it followed that the “price” of the corrections was nil. Accordingly, the 45 day period for preserving the lien was not extended by the rectification work carried out in January 2006, and thus when the contractor registered its lien in March 2006 it did so out of time.
In contrast to the Micon case, two other cases have adopted a different approach to harmonizing the principle that “defects do not extend lien rights” with the “completion” provision in subsection 2(3). These lines of authority have interpreted the words “correction of a known defect” in subsection 2(3) as not referring to work done by a contractor to correct its own deficiencies, but, rather, to work done by a contractor to correct deficiencies caused by others. One of these other cases also holds that the contractor is entitled to charge an extra to correct these deficiencies caused by third parties for whom it is not responsible.
In DCL Management Ltd. v. Zenith Fitness Inc., 2010 ONSC 5915 (S.C.J.), the plaintiff, a contractor, registered a lien against the defendant tenant’s premises. The parties had entered into a building contract to remove and dispose of all prior tenant interior improvements, so as to bring the premises to a state acceptable as a “base building” ready for new tenant improvements. The price of the contract was over $100,000 dollars; therefore, the price of “completion” under subsection 2(3) was deemed to be $1,000. The defendant tenant moved under section 47 of the CLA to discharge the lien and vacate registration of the claim for lien on the basis that the lien was not preserved within time limit specified by subclause 31(2)(b)(i) (lien of a contractor), and had thus expired.
Since DCL’s lien was preserved (registered) on July 20, 2010, if the contract was “complete” before June 5 (i.e. before the 45 day time period), then DCL’s lien was out of time. The key question was therefore on what date was the price of “completion” less than $1,000.
A major component of work that DCL claimed was not “complete” by June 5, 2010 was the supply, delivery and installation of two glass shelving units. Each party in the case blamed the other for the failure to complete this work. DCL alleged that the defendant’s architect had failed to provide proper drawings for the glass shelving units, which meant they were too short when initially fabricated and delivered to site for installation. In turn, the architect claimed that the fault lay with DCL’s subcontractor, as the latter was responsible for the fabrication of the glass shelving units. In any event, both parties agreed that the supply of the glass shelving resulted in a “deficiency” in the work that had to be corrected.
Master Sandler reviewed the evidence regarding the glass shelving units, as it was central to the issue to be determined on the rule 47 motion. Master Sandler began by holding that “work required to be done by a contractor to repair a defect in its work, or in that of any of its subtrades, cannot be relied on to extend the time for registering a lien” and, therefore, such work “cannot be considered ‘completion work’ under s. 2 (3) of the C.L.A.” However, as this principle appeared to contradict the express words in subsection 2(3), Master Sandler considered the point further, and went on to state that:
The reference in s. 2(3) to the supply of services or materials required for the “correction of a known defect” does not include work required to correct a defect or deficiency in the contractor’s own work or the work of his sub-contractors but rather, in my view must refer to the correction of work done by others for whom he is not legally responsible but which correction work is done at the request of the owner as an extra to its own contract.
Thus, Master Sandler distinguished subsection 2(3) by qualifying it. The new rule proposed by Master Sandler in DCL Management, without any authority relied on by him, now required a determination of whether the deficiency work was caused by a contractor (or a party under its control), or whether such work was caused by an unrelated party, for whom the contractor was not legally responsible. In addition, Master Sandler’s rule required examining whether this correction work was done at the owner’s request as an extra to the prime contract.
In view of this new rule, on the evidence before Master Sandler in DCL Management it was not clear as to whether the correction work for the glass shelving units was DCL’s fault (or its subcontractor’s), or whether it was caused by the defendant’s architect. If it was the fault of the former, it could not be relied on by the plaintiff contractor to claim the work was incomplete by the critical June 5, 2010 date. But if it was the fault of the defendant architect’s, then it conceivably could be relied on to extend the time period for the preservation of the contractor’s lien. However, given the uncertainty of the evidence on this point, Master Sandler concluded that there was a genuine issue for trial which could not be determined on the section 47 motion.
A similar approach to determining whether a contractor could extend its lien rights can be found in the case of Rosedale Kitchens Inc. v. 2114281 Ontario Inc., 2012 ONSC 3161 (S.C.J.). In this case, the plaintiff contractor had registered a claim for lien against a residence. A key issue was whether certain cabinet and millwork done at the residence was rectification work attributable to the contractor’s failures, or whether this work was done to rectify deficiencies caused by other trades working on the residence. Resolving this issue would in turn determine whether the lien was timely.
On reviewing the evidence in Rosedale Kitchens, Master Albert found that it was the latter; that is, the contractor’s work related to correcting deficiencies caused by others for which the contractor was not responsible. She found that this “rectification work” included items that a cabinet and millwork contractor could only complete after all the other trades had finished their work, including repainting areas where other trades had caused scratches and chipped paint. In essence, this work was not confined to mere touch-ups or rectification of the contractor’s own deficiencies. As a result, the contract was not “complete” when this cabinet and millwork rectification was carried out, and therefore the lien was preserved by the plaintiff contractor in time.
The correctness of the new rule
As noted, when deciding the DCL Management case, Master Sandler did not rely on prior authority to support the new rule that “correction of a known defect” in subsection 2(3) does not include work to rectify a contractor’s own deficiencies. It appears that this new rule is at odds with the interpretation of the similar language of clause 2(1)(b) of the CLA for determining substantial performance. Clause 2(1)(b) provides as follows:
2 (1) For the purposes of this Act, a contract is substantially performed,
(a) when the improvement to be made under that contract or a substantial part thereof is ready for use or is being used for the purposes intended; and
(b) when the improvement to be made under that contract is capable of completion or, where there is a known defect, correction, at a cost of not more than,
(i) 3 per cent of the first $500,000 of the contract price,
(ii) 2 per cent of the next $500,000 of the contract price, and
(iii) 1 per cent of the balance of the contract price.
The words underlined above are nearly identical to those used in the definition of deemed completion in subsection 2(3). However, when determining whether substantial performance has occurred under subsection 2(1), the calculation includes known defects in the work of a contractor, and the consultant assesses the cost of correction attributed to these defects to determine whether the monetary portion of the test for substantial performance in clause (b) has been satisfied. This approach was endorsed by Justice Whalen in Soo Mill & Lumber Co. Ltd. v. JJ’s Hospitality Ltd. and upheld by the Divisional Court and the Ontario Court of Appeal, 1993 CarswellOnt 814 (Gen. Div.); affirmed 1995 CarswellOnt 247 (Div. Ct.); affirmed 1996 CarswellOnt 3892. The result is that although very similar language is used in both subsections 2(1) and 2(3), the case law cuts in two completely opposite directions on the issue of whether a contractor’s own deficiencies can extend its lien rights.
The following points can be distilled from the above discussion of whether rectification of deficiencies can extend lien rights:
- Assuming that no certificate of substantial performance has been published, the law is clear that a subcontractor’s rectification of deficient or improper work does not extend the time for preserving the subcontractor’s lien.
- Some cases stand for the proposition that, in determining whether “completion” has occurred, correction of third-party deficiencies by a contractor does extend a contractor’s lien rights.
- A contractor’s correction of its own deficiencies or the correction of deficiencies of its subcontractors does not extend the time for preserving a contractor’s lien.
- This new rule in paragraph 3, articulated by Master Sandler, is inconsistent with the generally accepted interpretation of clause 2(1)(b) of the CLA, which uses the same language as subsection 2(3) for the definition of “completion”.
- Until the law is settled with respect to a contractors’ liens and the rectification of deficiencies, contractors should be very careful in determining when their lien rights expire if they are relying on the deemed “completion” provision in subsection 2(3) of the CLA.
NOTE: This article is based on the Construction Lien Act as it currently reads and does not reflect the changes to ss. 2 and 31 coming into force on July 1. These changes do not, however, affect the substance of the article and the case law cited.