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.
March 27, 2020
Are Lien Expiry Periods Really Suspended in Ontario and, if so, what about the Holdback? A Dilemma that Requires a Timely Resolution in Difficult Times – Because Workers Need to Get Paid.
In our most recent blog entry, we advised that “the timeframe within which a lien claimant must preserve a claim for lien may be extended” by the recent Order of the Ontario Superior Court which suspended limitation periods in Ontario under section 7.1(2) of the Emergency Management and Civil Protection Act (the “Order”). Since that time, a number of blogs and articles have categorically taken the position that this, clearly, has occurred. We don’t believe the interpretation is necessarily correct.
The stakes are high. If, indeed, the time within which a lien claimant must preserve a claim for lien in Ontario has been extended, there will be no expiry of lien periods such that holdback funds will have to be retained from contractors and suppliers for the duration of the emergency. This of course, will have a substantial impact. People won’t get paid at a time when they really need to.
The first operative sections of the Order (which might relate to lien preservation) read as follows:
“1. Any provision of any statute, regulation, rule, bylaw or order of the Government of Ontario establishing any limitation period shall be suspended for the duration of the emergency, and the suspension shall be retroactive to Monday, March 16, 2020”.
2. Any provision of any statute… establishing any period of time within which any step must be taken in any proceeding in Ontario, including any intended proceeding”. (Emphasis added)
As regards paragraph 1, both the creation and subsequent expiry of liens are creatures of the Construction Act and, accordingly, the only question is whether or not lien expiry is a “limitation period”. The Ontario Divisional Court has addressed the issue in relation to section 37 of the Act, which extinguishes a lien if no order for trial in which the lien can be enforced has been made within two years. It has consistently held that: “Section 37 extinguishes a lien. It is not a limitation period”. There is no reason why the same analysis should not apply to lien expiry under section 31 (which extinguishes liens not preserved in time). See: Benjamin Schultz & Associates Ltd. v Samet,  O.J. No. 1405, Golden City Ceramic & Tile Co. v Iona Corp.,  O.J. No. 2410, Glencoe Insulation Co. v. 3170497 Canada Inc.  O.J. No. 5834, Ravenda Homes Ltd. v 1372708 Ontario Inc.,  O.J. No. 510, Krypton Steel Inc. v. Maystar General Contractors Inc.,  ONSC 3836 and QH Renovation & Construction Corp. v 2460500 Ontario Ltd.,  ONSC 3237. A similar approach was taken on similar legislation by the Saskatchewan Queen’s Bench in Syed v. 612565 Saskatchewan Ltd.,  SKQB 141.
Whether or not paragraph 2 of the Order applies will depend on whether or not the preservation of a lien is a step which must be taken in an “intended proceeding”. Again, it is not at all clear that this is the case. There is certainly no obligation on a lien claimant to commence a proceeding in relation to the lien. Indeed, virtually all lien claimants preserve their claims for lien in the hope that proceedings will not actually be necessary. From that perspective, it might be difficult to hold that they “intend” proceedings.
As above, the stakes are high. Under section 22 of the Act, holdback must be retained “until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act”. If the Order extends subsisting lien rights, they will not expire and the Act will accordingly preclude the release of holdback funds (depending on the circumstances) for up to 60 days following the end of the emergency. Funds which contractors and subcontractors are relying on in difficult times could be held up for many, many months.
To be clear, the extension of lien rights will only apply to subsisting liens. Lien rights that had expired prior to or as at March 16, 2020 will not in any circumstance be revived by the Order.
Where liens subsisted as at March 16, 2020, Owners who don’t want to see contractors and subcontractors unreasonably suffer might rely on the aforementioned Divisional Court authority and release holdback on the basis that liens will expire notwithstanding the Order. They might also ask that a written, formal and irrevocable release of all lien rights be given by the contractor and its subcontractors/suppliers, so as to mitigate against the risk of liens being preserved after the release of holdback. Indemnities from the contractors in relation to the potential liens of subcontractors might also be considered. There would, however, be risks associated with these options. Lien claimants might later argue that the prior case law was limited to section 37 expiry and owners may be neither comfortable with an indemnity nor confident that releases have been obtained by all suppliers of services and materials to the improvement.
The Ontario Government has, commendably, taken steps to ensure that the income of workers in Ontario is protected or replaced so far as is possible during this crisis. The intention of the Order itself accordingly also appears to have been towards helping those with claims. We accordingly suggest that the Order should be varied to confirm that the timeframes for the preservation of liens under the Act (only) are not limitation periods. Alternatively, a stated case might go to the Divisional Court to confirm that the expiry under section 31 (in relation to preservation) is not a limitation period for the purposes of the Order.
Our thanks to Marco Drudi, of Drudi Alexiou Kuchar LLP for his valuable contribution to this article.
In our most recent blog, we noted that we were doing a free webinar on COVID-19 and Construction issues. The webinar covered issues including delay, frustration, force majeure, claims, notice, schedule extensions, suspension of work, termination of contract, dispute resolution as well as (with the help of our friends at Sherrard Kuzz LLP), OHSA, labour and employment issues including obligations, best site practices, work refusals, lay-off and termination issues, etc. The webinar was well received and extremely popular, with over 500 attendees. Accordingly, we will be re-running it this Tuesday March 31, 2020 at 9:00 am. We will then continue to offer free webinars during this Tuesday time-slot, again in conjunction with Sherrard Kuzz LLP. For more information or to register, please visit ‘webinars' page. Our past blogs are also available on this page.
Kennaley Construction Law