Security for costs in a construction lien action

Introduction

The registration of a construction lien under Ontario’s Construction Act, R.S.O. 1990, c. C.30 (formerly known as the Construction Lien Act) (the “Act”) is a powerful means of helping contractors and subcontractors to secure, at least in part, a debt for their supply of services and/or materials to a project. However, a lien has its limitations. This article addresses one particular limitation of a lien, which is the limited way in which it can be used to oppose a motion for security for costs. This limitation was recently considered by the Ontario Superior Court of Justice in 10760919 Canada Inc. dba Harbels Construction Ontario v. Crosslinx Transit Solutions Constructors, 2023 ONSC 887 (“Harbels”).

It is important to note that, and as explicitly noted in Harbels, that each motion for security for costs will be decided on its own facts [Harbels at para. 7].  Still, Harbels is a good example of where the defendant contractor, Crosslinx Transit Solutions Constructors (“Crosslinx”),  effectively “turned the tables” on the subcontractor lien claimant, 10760919 Canada Inc. dba Harbels Construction Ontario (“Harbels Construction”).

Legal test for security for costs

Crosslinx moved under subrule 56.01(1)(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 for an order for security for costs. The legal test for a motion for security for costs was not disputed and was confirmed by Associate Justice Robinson, writing for the court as follows: “Crosslinx bears the initial evidentiary burden of satisfying me that it “appears” that there is “good reason to believe” that Harbels has insufficient assets in Ontario to pay Crosslinx’s costs. If Crosslinx satisfies that initial onus, then the onus shifts to Harbels to demonstrate that an order for security for costs would be unjust.” [Harbels at para. 6, emphasis added].

Associate Justice Robinson went on confirm that “[9] To satisfy the threshold onus, Crosslinx is only required to show “good reason to believe” that Harbels has insufficient assets in Ontario. That threshold may be met by showing indicia of insolvency or instability, such as a failure to make corporate filings, unpaid judgments or liabilities, a temporary dissolution, a significant disposition of assets, or that the plaintiff is a single purpose entity or shell company.” [Harbels at para. 9].

The (dire) financial situation of Harbels Construction

Associate Justice Robinson made the following critical findings regarding Harbels Construction’s financial situation as it related to the legal test for security for costs, as cited directly from paragraph 10 of the Harbels decision:

• 1. Harbels has ceased business operations, no longer leases office space, and no longer has any employees;
  2. Harbels appears to have significant unpaid debts to the Canada Revenue Agency, the Workplace Safety and Insurance Board, and its subcontractors and suppliers;
  3. Harbels does not own any real property in Ottawa or the greater Toronto area;
  4.  Harbels (a federally incorporated company) has failed to make mandatory annual corporate filings in 2020 and 2021 and has not held an annual general meeting since October 31, 2019. These are requirements under the Canada Business Corporations Act, RSC, 1985, c C-44. I agree with Crosslinx that ongoing noncompliance does create a risk of Harbels being administratively dissolved for default;
  5. Harbels’ primary supporting affidavit admits that Harbels is “without resources”; and
  6. Harbels’ admits that its only assets are its claims for accounts receivable on the Eglington Crosstown LRT Project and a further claim of $1,973,276.02 against the Link 427 Construction Joint Venture for work performed by Harbels on the Highway 427 Expansion.

Findings in Harbels

Associate Justice Robinson granted Crosslinx’s motion and Harbels Construction was ordered to post security for costs in the amount of $215,000 [Harbels at para. 62] primarily on the grounds that (1) there was no injustice in requiring security for costs under the circumstances, (2) Harbels Construction admitted that it had no exigible assets, and (3) Harbels Construction failed to establish impecuniosity or that Crosslinx is the cause of its insolvency [Harbels at para. 47].

Holdback funds (to which a lien attaches) are an asset. Associate Justice Robinson confirmed that “holdback funds retained by the contractor, which represent earned and unpaid contract funds, were an asset of the subcontractor” [Harbels at para. 11, relying on the decision of Gowing Contractors Ltd. v. Walsh Construction Company Canada, 2022 ONSC 2192 at paras. 36-38]. However, the lien claimant must provide evidence of a strong claim that the lien attaches to holdback [Harbels at para 13]. In the case of Harbels, any additional holdback would flow to its subcontractors first.

Although Harbels Construction was unsuccessful in its opposition to the motion for security for costs, the decision in Harbels suggests that it is still available for a party responding to such a motion to argue that the party bringing the motion for security for costs “is the cause of its insolvency”  [Harbels at para. 47] and that the responding party is unable to secure funds to post security with “robust particulars of [the] financial situation.” [Harbels at para. 47]

The court in Harbels was alert to “procedural fairness” when considering security for costs in a lien action. Associate Justice Robinson confirmed that granting an order for security for costs is a way to “even the playing field by ensuring that an insolvent plaintiff is not given risk-free opportunities to pursue litigation.” Crosslinx posted lien bonds as security for Harbels Construction’s two fully disputed lien claims  [Harbels at para. 43 – 44].

In particular, the court will consider the fairness of a lien claimant receiving the benefit of security for the alleged debt by way of its lien (or at least partial security for a certain period of time – the lien is always subject to  being “tested” by way of a motion to have it reduced or discharged) while the party defending the lien may be left without any security to enforce a successful costs award (or other type of award) if the lien is ultimately defeated – “Harbels seeks to advance contingent claims, for which the lien aspect is fully secured, with no corresponding prospect of costs recovery for Crosslinx if it is successful in its defences” [Harbels at para. 47].

Take away

Contractors in the construction industry may feel that the registration of a lien gives them the “upper hand” against an alleged debtor. The decision in Harbels is a good example of where the plaintiff subcontractor exercised its statutory right to pursue a construction lien and Crosslinx “took the wind out of the sails” of the potential benefit of the lien by way of responding with a motion for security for costs.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Construction and Infrastructure team.