This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.
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December 2, 2019
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Confusion Surrounding the Transition Provisions of Ontario’s Construction Act: Should they apply on a “Single Improvement” Basis?
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This Article is a continuation of our previous Article on gaps, confusion and inconsistencies in Ontario’s Construction Act. Here, we focus on the transition provisions which apply to the Act’s changes effective July 1, 2018 and October 1, 2019. In each circumstance, whether or not the new provisions apply will depend on the interpretation of section 87.3 of the Act, which ties transition to the definition of “improvement”. This has created a fair bit of confusion (as was recently made clear at a meeting of the Construction and Infrastructure Law Section of the Ontario Bar Association).
It is unclear why the drafters of the Construction Act tied s.87.3 to the definition of “improvement”. In their Report Striking a Balance, for example, Bruce Reynolds and Sharon Vogel did not recommend this. Regardless, doing so was not necessary: when the Mechanic’s Lien Act became the Construction Lien Act in 1982, the new provisions simply applied to all contracts entered into after a specified date, without referencing the “improvement”.
Section 87.3 provides that, other than in relation to prompt payment and adjudication (and with certain exceptions)[i], the pre-July 1, 2018 provisions of the Construction Lien Act continue to apply with respect to “an” improvement if, prior to that date:
a) a contract for “the” improvement was entered into; or
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b) a procurement process for “the” improvement was commenced.
The prompt payment and adjudication provisions do not apply with respect to contracts or the subcontracts made under them if, prior to October 1, 2019:
a) the contract was entered into; or
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b) a procurement process for “the” improvement that is the “subject of the contract” was commenced.
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It has been suggested that, because of references to “the” improvement, the section must be applied relative to the date the first contract was entered into or procured in relation to the project, or ‘overall’ improvement. It has thus been suggested, for example, that:
a) if a contract for the design work for an ‘overall improvement’ was procured or entered into prior to July 1, 2018, all subsequent construction contract(s) for that improvement will be governed by the Construction Lien Act;
b) if an owner procured a contract for a geotechnical consultant to perform test-pits and bore-hole analysis for a planned project prior to October 1, 2019, that “contract” will be for the over-all improvement such that the prompt payment and adjudication provisions of the Construction Act will not apply under subsequent design or construction contracts for “the improvement” regardless of when those are procured or entered into;
c) there may be circumstances where, for example, a design or geotechnical contract was procured or entered into many years ago (with the owner arranging financing or facing other delays in the interim) such that investigations going back a very long way will have to be made to determine which provisions apply;
d) such investigations will be difficult (if not impossible), as neither s.39 nor any other provision of the Act allows a supplier of services or materials to ask an owner when a contract was first entered into in relation to an over-all improvement; and
e) accordingly, the whole thing is a bit of a mess.
Although we agree that the transition provisions are unnecessarily confusing, we do not agree with this interpretation. There is nothing in the Act which expressly establishes the concept of the “over-all” improvement. There is also nothing in the Act which expressly suggests that its application on a single project cannot differ depending on when various contracts are procured or entered into.
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Our Courts have at times held that there can be but one ‘over-all’ improvement under which there may be several (if not many) contracts. Such cases should, we suggest, be distinguished as regards s.87.3 because they are generally limited to circumstances where either priorities (vis-à-vis pooling provisions, mortgages and the sale of the premises)[ii] or sheltering[iii] are at issue.
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As regards the former, a ‘one overall improvement’ approach is necessary as it would not be possible to sell a premises or establish mortgage priorities in a vacuum relative solely to the liens proven in one contract stream. (This, of course, would result in liens in another payment stream having potentially lesser, if not no, security).
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In one case over priorities, Boehmers v. 794561 Ontario Inc.[iv], Justice Killeen went so far as to equate the “improvement” with the “project”, stating that the “term 'improvement' is meant to be a term of art” and that it “is the project designed and to be undertaken as between the owner and general contractor, whether it be a new building or some mere alteration, addition or repair”. We submit that Justice Killeen’s finding in this regard is obiter, in that the ratio of the decision is that only contracts (and not subcontracts) can be deemed complete under s.2(3) of the Act. We do not believe the decision should stand as authority that “the improvement” should be equated with the “overall improvement” project for the purposes of the entire Act.
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As regards sheltering, the ‘overall improvement’ construct has been applied to relieve otherwise un-perfected liens from discharge (perhaps in the context of potential solicitor’s negligence). We do not believe, in this context, that the cases should dictate that “the improvement” must necessarily include for every contract that might have been entered into in relation to an overall project.[v]
The Act is replete with references to “the improvement”. The phrase occurs, in fact, 86 times in the current legislation. We submit that, generally, the words “the improvement” have been and should be interpreted to apply on a contract by contract basis. For example:
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a) the Act continues to provide[vi] that substantial performance cannot occur until “the improvement to be made under that contract or a substantial part thereof is ready for use”. The ‘one overall improvement’ approach has never applied to the determination of substantial performance. If it did, a certificate of substantial performance could never be published in relation to a geotechnical, design or other contract entered into in relation to an overall project. The Act, we suggest, has never been interpreted this way[vii];
b) the Act continues to provide[viii] that “where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage … to the extent of any deficiency in the holdbacks required to be retained by the owner”. (Emphasis added). Applying the ‘one overall improvement’ construct to this provision would potentially result in a mortgagee who finances the geotechnical or design work (using our examples) losing priority to the extent of the holdback to all liens to come in relation to future construction work on the project. We suggest that this would be a commercially impractical and somewhat absurd application for which there is no case law authority. (Similar issues arise in relation to prior and subsequent mortgages, as mortgage priorities in those cases are again tied to ‘the improvement’ in some respects); and
c) similar issues might arise in relation to the definition of ‘owner’ under the Act[ix], as an entity who procures geotechnical work to explore the potential of development on a site may become an owner of the subsequent construction work regardless of the extent to which it otherwise meets the definition in relation to that subsequent work.
It is also useful, we suggest, to consider how the term “owner” is dealt with under the Act. While it is well settled that there can be more than one “owner” of a premises or improvement, the Act repeatedly references “the owner”[x], as if there might only be one. Construction participants, lawyers and judges are left to determine how the reference to “the owner” ought to be interpreted in any particular circumstance. Although an in-depth analysis of the issue is beyond the scope of this article, no one would suggest that references to “the owner” should be universally interpreted to apply to one specific person or entity. We submit that, as is done with the phrase “the owner”, a contextual approach needs to be taken to the phrase “the improvement”.
We suggest that the Act (including s.87.3) should be interpreted such that improvements arise on a contract by contract basis, other than in limited circumstances such as where priorities or (perhaps) sheltering are in issue. Applying the transition provisions on a contract by contract basis, after all, is the approach that was taken in 1982. We see no reason to place an onus on everyone who participates in construction in Ontario to have to engage in uncertain and time-consuming efforts to determine if a contract may have been entered into some number of years ago in relation to the ‘overall improvement’, particularly given that many will lack access to the information or documentation required to make an informed decision in this regard.
We recognize that applying s.87.3 on a contract by contract basis will have some practical consequences. For example, where an owner ‘acts as its own general’ or under a CCDC5A contract (where the construction manager is not ‘at-risk’ and the owner enters into numerous trade contracts with individual contractors) some participants on a project might be bound by different provisions (including prompt payment and adjudication) depending on the date that their individual contact was procured or entered into. Still, we see these as temporary issues that are not insurmountable and which will resolve themselves over time. We believe that impacts of such temporary and logistical difficulties pale in comparison to the potential long-term impact of determining that, generally speaking, there is but one ‘overall improvement’ to a premises for the purposes of the Act. They also pale, we submit, in comparison to the difficulties many will face in attempting to determine if and when a prior contract for the ‘overall improvement’ was procured or entered into.
Of course, a legislative resolution would be optimal.
Robert Kennaley and Josh Winter
Kennaley Construction Law
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[i] relating to premises against which a lease was registered prior to December 6, 2018 and when a lien against the interest of a municipality must be preserved by registration.
[ii] see for example Boehmers v. 794561 Ontario Inc. [1993] 11 C.L.R. (2d) 99 and Ontario Wealth Management Corp. v. 1713515 Ontario Ltd., 2013 ONSC 6503
[iii] see for example Moffatt & Powell Ltd. v. 682901 Ontario Ltd. [1992], 49 C.L.R. 205, State Group Inc. v. Quebecor World Inc. [2013], 31 C.L.R. (4th) 164 and Tri-Haven Homes Inc. v. O'Neill [1995], 22 C.L.R. (2d) 105.
[iv] supra
[v] for what it is worth, we disagree with the Striking the Balance recommendation that sheltering not be eliminated, but that is a subject for another day.
[vi] s. 2(1).
[vii] see Lindsay Brothers Construction Ltd. v. Halton Hills Development Corp. [1992], 4 C.L.R. (2d) 168 for a discussion of why delaying substantial performance and thus the release of basic holdback in relation to individual contracts goes contrary to the legislative intentions of the Construction Lien Act.
[viii] s.78(2).
[ix] s.1.
[x] 108 times, in fact, in the current version
