On October 1, 2019, the prompt payment and adjudication provisions under the Construction Act came into force in Ontario. As the Divisional Court in SOTA Dental Studio Inc. v. Andrid Group Ltd., 2022 ONSC 2254 and Pasqualino v. MGW-Homes Design Inc., 2022 ONSC 5632 stated, one of the fundamental objectives of these provisions is to allow funds to flow down the contractual pyramid.
The Court in Okkin Construction Inc. v. Apostolopoulos, 2022 ONSC 6367 considered the impact of holdback provisions on an owner’s obligation to satisfy an adjudication order pending determination of outstanding lien claims. The Court found that it had no jurisdiction to interfere with the Adjudicator’s Order and released the funds presently held in trust to the lien claimant.
Background
A homeowner hired the Bond Group to make improvements on his family home. After experiencing project delays, the Bond Group hired Okkin Construction Inc, to assist. The Bond Group issued invoices as the project progressed, and the homeowner paid the invoices in full. The invoices did not include the statutory holdback. When the project went over budget, the homeowner refused to pay and terminated the contract. The Bond Group commenced a claim against the homeowner.
The Bond Group filed a Notice of Adjudication under the Construction Act. Okkin and the Bond Group each registered a construction lien against title. The Adjudicator ordered that the homeowner pay the Bond Group a portion of the its invoices, amounting to $207,668.91 (the “Adjudication Order”).
The homeowner did not satisfy, nor did he seek leave to appeal the Adjudication Order. Instead, he commenced a motion for direction in the Ontario Superior Court of Justice and paid $207,668.91 into an interest-bearing trust account. Afterwards, the Bond Group filed the Adjudication Order with the Court, which pursuant to the Act is enforceable as an Order of the Court.
The homeowner was concerned that the Adjudication Order did not address the 10% statutory holdback or notice holdback relating to the subtrade lien. A notice holdback arises when a payer receives written notice of a lien before payment. When a payor receives such notice, it must retain sufficient funds to pay out the lien. The homeowner was concerned that he might have to pay twice. The homeowner and Okkin asked the Court to direct the balance of the amount ordered by the Adjudicator be paid into Court.
The Bond Group argued that the homeowner had an opportunity to raise the issue of holdback in its submissions before the Adjudicator and did not. Further, that the route of appeal from the Adjudication Order was to the Divisional Court with leave, and that the time for seeking leave had expired.
Analysis
The Court examined whether it had jurisdiction to consider this matter and, if so, whether it should direct that the funds presently held in trust should be released to the Bond Group.
Justice Fraser concluded that the Court did not have jurisdiction. An application for judicial review of an adjudicator’s order may only be brought with leave and will only be granted in the limited circumstances specified in s. 13.18(5) of the Act, none of which appears to apply here. At the time that the motion was brought, the Adjudication Order had not been filed with the Court.
In SOTA Dental Studio Inc. v. Andrid Group Ltd., 2022 ONSC 2254, the Divisional Court stated that there is no automatic stay of an adjudicator’s order upon filing an application. The Divisional Court in Pasqualino v. MGW-Homes Design Inc., 2022 ONSC 5632 addressed the purpose of the Adjudication provisions:
[30] The Adjudication provisions were introduced into the Construction legislation to provide a quick, efficient, interim determination allowing funds to flow down the contractual “pyramid”. I stress that adjudication determinations are interim, allowing the parties to continue litigating the issues, including those the subject of the Adjudication determination to a final and binding determination in the courts or by arbitration. See s. 13.15(1) of the Construction Act.
One of the fundamental objectives sought to be overcome by the Adjudication and requirement that any payment occurs forthwith after determination.
Upon reviewing the above noted case law, Justice Fraser concluded that absent a stay, which was not sought here, an Adjudication Order had to be paid even if it meant that someone might have pay twice in the short term. This allows the contractor to ensure that funds flow. It is possible under the Act to seek a reduction in the amount of security posted.
The court found that the homeowner’s concerns of paying twice ignored the trust provisions of the Act. When the homeowner makes payment, the Bond Group has to respect the trust provisions of the Act, including s. 8, which sets out that all amounts received by a contractor on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor. When the homeowner pays the Bond Group in accordance with the Order, the Bond Group is a trustee for Okkin and may not appropriate or convert for its own use any part of the trust until all the subcontractors and other persons who supply services or materials have been paid. The homeowner will get credit for this payment and money can flow from the contractor to the subcontractor. The Court stated that directing that the proceeds of the Adjudicator’s Order continue to be held in trust would defeat the purpose of the prompt payment provisions of the Act and create a path for delay.
The Court found that it had no jurisdiction to interfere with the Adjudicator’s Order. The funds presently held in trust were ordered to be released to the Bond Group.
Key Takeaway
This case further emphasizes the intention of the prompt payment and adjudication schemes in allowing funds to flow down the contractual pyramid. The Court has limited abilities to interfere with an adjudicator’s order, particularly if the party seeking to vary the order had not previously sought leave to bring an application for judicial review of the order.