The Conflicting Logics of Construction Lien Law in Ontario: Should the Divisional Court in Smiley Have Turned to the SCC’s Structal Decision for Guidance?

Not even a week after the Supreme Court of Canada (“SCC”) released its precedent changing decision in Stuart Olson Dominion Construction Ltd. v Structal Heavy Steel, 2015 SCC 43 [Structal] pertaining to the proper interpretation of provincial construction lien statutes, the Ontario Divisional Court (“ODC”) released its latest construction lien decision in K.H. Custom Homes Ltd. v Smiley [Smiley], 2015 ONSC 6037 on the Ontario Construction Lien Act, RSO 1990, c. C.30 [CLA]. While the issues in each decision appear quite different, upon closer analysis, the SCC’s purported in legacy in Structal might have broader application to reasoning through the issues in Smiley.

In Structal, the Supreme Court interpreted the lien and trust provisions of the Manitoba Builders’ Lien Act, CCSM c. B91 [BLA] and provided guidance on the interaction of these provisions. The context was a subcontractor bringing concomitant lien and breach of trust claims against a project owner and general contractor respectively. The issue before the SCC was whether a contractor’s statutory obligation to hold a sub-contractor’s monies in trust was properly discharged by posting a lien bond guaranteeing payment of the entire amount to the sub-contractor. The SCC ultimately found the trust and lien provisions under the BLA to be separate and distinct remedies, simultaneously available to claimants. As a result, it held that the funds claimed to be owing were subject to a trust despite the contractor having posted a lien bond for the entire amount.In Smiley, the ODC determined that the Plaintiff corporation’s failure to comply with one of three mandatory procedural requirements set out in the CLA prevented the Plaintiff corporation from pursuing a breach of contract claim in addition to an action to enforce the lien dismissal under s 46 of the CLA. While admitting that cases have gone both ways on this issue, the ODC held that binding authority from the Ontario Court of Appeal (“ONCA”) in Teepee Excavation & Grading Ltd. v Niran Construction Ltd., 2000 CanLII 3447 (ONCA) [Teepee] required it to conclude that under s 46 the court had discretion to dismiss the entire action and that, in this instance, only the lien claim must be dismissed.

The SCC’s recent decision in Structal can be understood more broadly as a requirement to maintain a clear distinction between a lien claim and other remedies, such as a breach of trust action. Viewed in this way, Structal is partially at odds with Smiley. Although the ODC upheld the distinction between the breach of trust claim and a claim for breach of contract, it acknowledged that a discretion exists for lower courts to dismiss a claim in its entirety. That discretion applies even in situations where other causes of action exist outside the claim to enforce the lien. Perhaps the ODC could have turned to the Structal decision as an authority if the SCC had elaborated more thoroughly on the scope and applicability of that decision.

Facts and Reasoning in Smiley

The Plaintiff corporation in Smiley was a building contractor that performed work to the Defendant’s property. The Plaintiff alleges that it completed the work and was not paid by the Defendant. It registered a lien against the Defendant’s property and commenced an action to enforce the lien in the Superior Court of Justice. Unlike in many lien claims brought by sub-contractors, the Plaintiff in this case had privity of contract with the owner. It thus asserted a claim against a defendant for a construction lien and for breach of contract.

The triggering event that barred the Plaintiff from proceeding with the lien action was that the Plaintiff failed to set the action down for trial within two years of commencing the claim as is required by Section 37(1)(c) of the CLA. When a Plaintiff fails to comply with this mandatory requirement, a Defendant can bring a motion under s 46 to have the action dismissed. The motions judge dismissed the entire action including the claim for breach of contract on the basis that it was required to under s 46 of the CLA. Upon appeal to the ODC, the judge was faced with two competing interpretations of what it meant to dismiss “the action to enforce that lien” under s 46 of the CLA: either s 46 pertains to the entire proceeding in which the lien remedy is sought, or it pertains only to the portion of the proceeding to enforce the lien remedies.

The ODC ultimately concluded that the legislature never intended that s 46 be used for mandatory dismissal of contract claims and that courts should have discretion to decide whether a contract claim or other cause of action should proceed. It based this decision not only on the Court of Appeal’s precedent in Teepee, but on the wording of s 38 of the CLA, which provides that the expiration of a lien under the CLA shall not affect any other legal or equitable right or remedy otherwise available.

The potential for a trust claim to conflict with a lien claim

According to Smiley, a contractor bringing an action against an owner to enforce a lien and a concomitant action for breach of trust could forfeit their right to bring the trust action if they fail to set the action down for trial within two years, as the discretion to dismiss the trust action would lie with the judge. While the decision in Smiley clearly aligns with the ODC’s jurisprudence on a judge’s discretion to dismiss a trust action in such situations, it is less than clear what factors should temper a court’s discretion. Aside from the ODC’s statement at para 22, it provides little guidance on how this discretion is to be exercised: “in cases where the contract claims are closely related to the subsisting lien claims…and it may serve the interests of justice to have the contract claims continue in the lien proceeding to conserve judicial resources and guard against inconsistent decisions.” This ambiguity creates tension with the SCC’s holding in the Structal decision, which says that at the very least, lien claims and trust claims are to be treated as two separate remedies, and that at the most, all remedies available to a litigant are separate from the lien action. Thus, a judge hearing a motion to dismiss a construction lien claim under s 46, would necessarily be bound to not dismiss the entire claim, where the Plaintiff has brought an action to enforce a lien and for breach of trust on the same set of facts. Yet it is apparent that the ODC did not consult the Structal decision for guidance of any type, or if they did consult it, there is no reference to it in the decision.

 Conclusion

I do not suggest that because the ODC did not reference the SCC’s decision in Structal that theSmiley case was wrongly decided. Quite the contrary. The ODC was necessarily bound by the Court of Appeal’s decision in Teepee. However, the tension between these two decisions creates a potential for conflict if a motion is ever brought to dismiss a concomitant lien and trust claim by virtue of the Plaintiff failing to comply with s 37(1)(c). In any event, if such a scenario arises, it is likely that the motion judge’s discretion will be tempered by the SCC’s holding in Structal.