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May 24, 2023
Ontario’s Divisional Court Holds that a Trust Claim cannot be joined with a Lien Claim:
Devlan Construction Ltd. v. SRK Woodworking Inc. and the ‘So What’ of it all
On May 23, 2023, Ontario’s Divisional Court released its decision in Devlan Construction Ltd. v. SRK Woodworking Inc. et al, 2023 ONSC 3035, determining that, pursuant to s. 3(2) of O. Reg. 302/18 under the Construction Act, R.S.O. 1990, c. C.30, a trust claim cannot be joined with a lien claim in an Ontario construction lien proceeding. In writing for a three-Justice panel of the Court, Justice Corbett sided with the Appellant and ultimately held that: “in light of the purpose and language of the Act and the Regulation, I conclude that joinder of trust claims in a construction lien action is not permitted.” We acted for the Appellant, Devlan Construction Ltd.
Although the decision is of primary significance to construction law counsel, it holds practical significance to construction law litigants in Ontario. This, because (unless the Act or Regulation is further amended) lien proceedings will not be subject to the potential delays and increased costs associated with a trust claim. This can be important where money, land and/or security is tied up pending the resolution of lien claims, particularly for parties that have no role or interest in the trust claims of another. As will be discussed in more detail below, while requiring trust actions to be commenced separately will once again require a second set of pleadings, we believe this to be outweighed by the fact that lien actions can continue to proceed as summarily as possible in accordance with the Act, and will not be necessarily be bogged down with the additional parties, documents, issues, interlocutory steps and costs associated with often complex and document intensive trust proceedings.
By way of background, Ontario’s Construction Lien Act was renamed the Construction Act in 2017. Substantial changes included the removal of sections 50(2) (which had expressly precluded the joinder of trust claims and lien claims) and 55(1) (which had allowed lien claims to be joined with claims for breach of contract and subcontract). Over a year-and-a-half later, however, s. 55(1) was re-introduced by virtue of section 3(2) of Regulation O. Reg 302/18. Accordingly, by May of 2019 while the expressed prohibition against the joinder or trust claims had been removed, the provision allowing joinder for contract or subcontract claims was back in place.
The issue of whether or not the re-introduction of former s. 55(1) by way of Regulation precludes the joinder trust claims first came before Ontario’s Construction Lien Court in Toronto, where Associate Justice Wiebe held that it did (in Damasio Drywall v. 2444825 Ontario Limited, 2021 ONSC 8398 and 6628842 Canada Inc. v. Topyurek, 2022 ONSC 253). In the matter under appeal, the issue then came before the Honourable Justice Harper (in SRK Woodworking Inc. v. Devlan Construction Ltd. et al, 2022 ONSC 1030), who held that joinder was permissible. Justice Harper also held that s. 3(2) was ultra vires and of no force or effect because the Lieutenant Governor in any event had no authority to prohibit joinder by way of Regulation.
Before the Divisional Court, we argued that Justice Harper had failed to consider historical case law which had interpreted the original s. 55(1) to effectively bar the joinder of non-contract or subcontract claims, that a trust claim is not made in contract or subcontract (as those terms are defined under the Act) and that extensive case law requires lien actions (as opposed to trust actions) to be conducted as summarily as possible (pursuant to s. 67(1) of the Construction Lien Act, which is now s. 50(3) of the Construction Act). We submitted that s. 3(2) of the Regulation is not ultra vires and should be interpreted as s. 55(1) always had been: to preclude the joinder of non-contract and subcontract claims, such as trust claims.
In writing for the Divisional Court, Justice Corbett did not reference case law beyond Associate Justice Wiebe’s decisions on the issue (referenced above). The Court’s decision, however, is consistent with the cases dealing with joinder in the context of the old s. 67(1): it held that allowing joinder would significantly complicate the narrow issues of breach of contract in a lien action leading to an increase in documentary production, examinations for discovery, number of parties, issues to be tried, length of trial and costs. The Court further held that, in permitting the joinder of contract and subcontract claims, s. 3(2) of the Regulation “ousts the application of the Rules of Civil Procedure in respect to joinder of claims” because the Act expressly provides (at s. 50(2)) that the Rules do not apply where they are inconsistent with the Act or its Regulations. It finally held that s. 3(2) of the Regulation is neither ultra vires nor inconsistent with the Construction Act.
SRK had argued (following Justice Harper) that the legislature's intention can be found in its having specifically prohibited the joinder of trust claims in the prior Act and then repealed that prohibition in the new. On this point, we argued that the question of legislative intention is not “Why was the expressed prohibition on trust joinder repealed in 2017?” but, rather, “Why was the general prohibition on the joinder of non-contract claims reintroduced by Regulation in 2019?”. On this issue, the Court held that a line of reasoning which focuses on the legislature’s intention in the prior Act “conflicts with the principle of statutory interpretation set out in the Legislation Act that precludes construing a current provision on the basis of prior versions of the legislation.”
In the end, as indicated, the Divisional Court has determined that trust claims cannot be joined with lien claims in an Ontario construction lien proceeding. In doing so, the Court pointed out that while there are “policy arguments on both sides”, the issue before it was “not a question of the wisest policy choice to be made. The question is: what do the Act and the Regulations provide?”. Justice Corbett then went on to conclude that “If I am wrong in my reading of the Act and the Regulation, this error may be easily remedied. The Regulation can be amended to address joinder of trust claims expressly.”
Time will tell if the legislature or Lieutenant Governor will decide that the joinder of trust claims should be expressly allowed for. In this regard, we have no knowledge as to why the Lieutenant Governor reintroduced s. 55(1) by way of Regulation in May of 2019. That having been said, however, it makes sense to us that the joinder of trust claims (like all other non-contract claims) continue to be prohibited. This because, while requiring trust actions to be commenced separately will involve a second set of pleadings, the inconvenience and expense is outweighed by the flexibility afforded by separate proceedings. As indicated above, lien actions can proceed as summarily as possible in accordance with the Act, and not be necessarily bogged down with the additional parties, documents, issues, interlocutory steps and costs associated with often complex and document intensive trust proceedings.
In appropriate cases, of course, an order can go that lien and trust proceedings be tried with or immediately following one another, with a shared set of productions and discoveries. By prohibiting joinder, however, the Regulation ensures that no party can insist that lien proceedings be delayed and complicated by trust claims. (In this regard, see the Ontario Court of Appeal decision in Duggan v. Durham Region Non-Profit Housing Corporation, 2020 ONCA 788 (CanLII), at para. 38-40, where it was held that Ontario Courts have no discretion, absent the parties’ consent, to order a bifurcated hearing.)
There is this to be added. Parties to Ontario lien actions in which trust claims have been joined must consider the implications of the Divisional Court’s decision in this case. In some circumstances, a motion to strike the trust claims may be appropriate. In others, parties may simply wish to stand down the trust portions of the litigation with a view to having the claims struck at the opening of trial. Claimants, however, should consider a fresh action to pursue their trust claims (subject to the intervening expiry of a limitation period). Orders can then be obtained (where appropriate) directing that the actions be heard with or immediately following one another and that any previous oral and documentary discovery on the trust issues be deemed to apply in the new trust proceeding. Particularly as regards limitation periods, of course, the availability of a fresh action should be reviewed promptly.
Rob Kennaley and Darcia Perry
Kennaley Construction Law