Preserving/registering a construction lien can be stressful for construction lawyers. This is often due to the tight deadlines prescribed by the Construction Act, R.S.O. 1990, c. C.30 (the “Act”) to preserve the lien. Construction lawyers are often faced with receiving a significant volume of information and/or documents from the client with little time to fully understand the nature of the claim before the preservation deadline arrives. In the recent case of 2708320 Ontario Ltd. cob Viceroy Homes v. Jia Development Inc., CB Bridle Path Inc. and Kingsett Mortgage Corporation,[i] the Ontario Superior Court of Justice considered the appropriate legal test with respect to a lawyer’s obligation to determine that any construction lien the lawyer is instructed to preserve is not invalid. Viceroy v. Jia considers section 86(1)(b)(i) of the Act, which provides that a lawyer could be liable for the payment of legal costs in connection with the preservation and/or perfection of a construction lien.
The legislation
In Viceroy v. Jia, the court determined that the “old” provisions of the Act[ii] applied to the situation at hand. Section 86(1) of the “old” provisions of the Act read as follows:
Costs
86 (1) Subject to subsection (2), any order as to the costs in an action, application, motion or settlement meeting is in the discretion of the court, and an order as to costs may be made against,
-
- a party to the action or motion; or
- a person who represented a party to the action, application or motion, where the person,
- knowingly participated in the preservation or perfection of a lien, or represented a party at the trial of an action, where it is clear that the claim for a lien is without foundation or is for a grossly excessive amount, or that the lien has expired, or
- prejudiced or delayed the conduct of the action,
and the order may be made on a substantial indemnity basis, including where the motion is heard by, or the action has been referred under section 58 to, a master, case management master or commissioner.
The “new” provisions of the Act which came into force effective July 1, 2018 replaced the phrase “a grossly excessive amount” with “a willfully exaggerated amount,” and added the phrase “is frivolous, vexatious or an abuse of process.” This change in language is not relevant to the decision in Viceroy v. Jia.
Procedural history
On April 14, 2023, Associate Justice Wiebe released a decision whereby he ordered the discharge of the construction lien and dismissed the action of the plaintiff, 2708320 Ontario Ltd. cob Viceroy Homes (“Viceroy”) pursuant to section 47 of the Act and he found that the claim for lien was frivolous, vexatious and an abuse of process (the “Discharge Motion”).[iii] The decision in the Discharge Motion can be found at 2023 ONSC 2301.
On June 2, 2023, Associate Justice Wiebe issued a costs decision whereby he awarded costs in favour of the defendant, Bridle Path, in the amount of $85,000 for the Discharge Motion and the action, and in favour of the defendant, Jia Developments, in the amount of $45,000 for the dismissal motion and the action. Associate Justice Wiebe also ordered that Viceroy and its principal, Andrew Sun, were jointly and severally liable to pay these costs (the “Costs Decision”).[iv] The Costs Decision can be found at 2023 ONSC 3361.
The decision in Viceroy v. Jia as discussed herein considered the motions by the defendants to have the costs awarded in the Costs Decision payable by the law firm that represented the lien claimant (Viceroy) in the action.
Summary of the relevant facts
Viceroy was retained by Jia and Bridle Path to perform construction work at a project whereby 66,000 square feet of living space would be constructed by Viceroy from “foundation to completion” for a price $20,000,000 and the work was to be completed in eight months after the execution of the agreement (the “Agreement”).[v]
On April 26, 2022, Viceroy instructed its lawyers, Fogler, Rubinoff LLP (“Fogler”), to preserve a construction lien in the amount of $3,740,300 and the lien was registered the next day.[vi] Viceroy claimed to have performed work for a period of 39 days (from March 1, 2022 to April 8, 2022) and that the value of the work for which it was claiming was $3,740,300.[vii]
Counsel for Jia and Bridle Path challenged the validity of the construction lien and examined the principal of Viceroy pursuant to section 40 of the Act. During the section 40 cross-examination, the principal of Viceroy admitted that large parts of the work described in the Viceroy claim for lien were in fact not done and that the Viceroy claim for lien included materials that were not delivered to the project site. Immediately after the section 40 cross-examination, the lawyers at Fogler advised Viceroy that some of the claim for lien was now indefensible.[viii] The additional information to support the validity of the construction lien sought by the defendants during the section 40 cross-examination, and that Viceroy undertook to provide, was ultimately not provided by Viceroy.
On November 22, 2022, Fogler recommended to Viceroy that its claim for lien be discharged. These instructions were not given by Viceroy.[ix] There was now a breakdown in the relationship and on January 16, 2023 Fogler brought a motion to remove itself as the lawyer of record. The removal motion was granted.[x]
The test for liability for costs under Section 86(1)(b)(i) of the Act
Associate Justice Wiebe found that the legal test as to whether a lawyer can be liable for damages pursuant to Section 86(1)(b)(i) is broken down into 2 parts:
- The first part of the test is at the time that the lien is preserved. Associate Justice Wiebe found that this part of the test “requires a finding that the representative subjectively knew of the baselessness of the claim for lien when it was registered and perfected.”[xi] This is a subjective test that requires the lawyer to have “real” knowledge and it is a higher standard than negligence. Associate Justice Wiebe’s explanation of this finding is as follows:
[49] This interpretation of section 86(1)(b)(i) seems reasonable, and I agree with it. While a lawyer in a lien case has a gatekeeper function, this function must be melded with the lawyer’s first duty to his or her client. Legal costs are a readily foreseeable and an almost unavoidable part of any lien proceeding. Corporate parties indeed must employ lawyers. If the negligence standard is applied to a lawyer’s liability for costs under section 86(1)(b)(i), lawyers will think twice about taking on lien cases given the inevitability of legal costs, as there is often limited corroboration and limited time in which to preserve and perfect liens. Lawyers will wonder whether anything they do will breach the objective standard of care and expose them to costs. There will be a chilling effect on legal representation for lien claimants, which is not, in my view, what the legislature envisioned. However, should be lawyer know that the claim for lien is baseless when it is preserved and perfected, he or she should be liable for costs as his or her actions would be tantamount to fraud. [Emphasis in bold added].[xii]
- The second part of the test is after the lien is preserved and perfected. Associate Justice Wiebe found that this second part of the test is a negligence standard. His explanation of this finding is as follows:
[52] Now, as Master Albert pointed out in Fletcher [Brian T. Fletcher Construction Co. Ltd. v. 1707583 Ontario Inc., 2009 CanLII 81402 (ONSC)], once the preservation and perfection are done, the gatekeeper function continues. In my view, it moves quickly into the one judged by the negligence standard in section 86(1)(b)(ii), section 35 and Rule 57.07(1), with the lawyer having to continue his or her investigation as judged by the standard of a reasonable and prudent lawyer, taking appropriate measures should the lien eventually be found by them, or ought to be found by them, to be baseless.[xiii]
Associate Justice Wiebe also found that liability for costs under section 86(1)(b)(i) includes recklessness and willful blindness.[xiv]
In conclusion, Associate Justice Wiebe found that Fogler was not liable for costs because there was insufficient evidence that Fogler “had actual knowledge of the baselessness of the Viceroy lien when it was preserved and perfected, or that [Fogler] was reckless or willfully blind in this regard.”[xv]
Takeaway
While the Court in Viceroy v. Jia has provided construction lawyers with the benefit of a legal test with a “higher” standard at the time that the lien is preserved and perfected, a construction lawyer cannot rely on that test as the action progresses. Any imperfections in a lien claimant’s position must be investigated promptly after the lien is perfected and counsel for a lien claimant must consider the strength of the client’s supporting documents as they relate to proving a valid lien after the “door is opened.” A lawyer that preserves a claim for lien is a gatekeeper with respect to preservation and perfection of the lien, but becomes more of a custodian of the claim shortly thereafter.
Should you have any questions, please do not hesitate to reach out to a member of Miller Thomson’s Construction and Infrastructure group.
[i] 2708320 Ontario Ltd. cob Viceroy Homes v. Jia Development Inc., CB Bridle Path Inc. and Kingsett Mortgage Corporation[i], 2023 ONSC 1608 [Viceroy v. Jia]
[ii] In referencing the “old” provisions of the Act, we are referencing the provisions of the Construction Lien Act R.S.O. 1990, c. C.30 which was significantly amended and renamed as the Construction Act (Ontario) effective as of July 1, 2018. When referring to the “old” provisions of the Act, we are in fact referring to the provisions of the Construction Lien Act (Ontario).
[iii] Viceroy v. Jia, supra note 1 at para. 1
[iv] Ibid at para. 2
[v] Ibid at para. 9
[vi] Ibid at para. 15
[vii] Ibid at para. 58
[viii] Ibid at para. 28
[ix] Ibid at para. 34
[x] Ibid at para. 35
[xi] Ibid at para. 47
[xii] Ibid at para. 49
[xiii] Ibid at para. 52
[xiv] Ibid at para. 54
[xv] Ibid at para. 56
