Divisional Court Provides a Guide to Calculating the Lien Amount

27 avril 2018 | Pietro Palleschi | Markham, Vaughan

( Disponible en anglais seulement )

Canadian Consulting Engineer

The purpose of the Construction Lien Act (the “Act”) (soon to be the Construction Act), among other things, is to secure payment of amounts properly due to those who contribute services and materials to an improvement to land.[1]

In HMI Construction Inc. v. Index Energy Mills Road Corp., the Divisional Court provided a guide to lien claimants to assist them to properly determine the lien amount.  The decision, in effect, provides a guide that can be used to protect a lien claimant from the cost consequences that may arise under s. 35 of the Act.

 

Background

In December 2012, HMI Construction Inc. (“HMI”) entered into a fixed price contract with the Owner/Defendant, Index Energy Mills Road Corp. (“Index Energy”) in connection with a construction retrofit and replacement project at an energy production facility.

A dispute arose between the parties.  In May 2015, notices of default were issued to HMI and the contract was terminated by Index Energy on or about July 28, 2015.  HMI registered two construction liens against the project totalling $32,807,468.11.

Index Energy brought a motion for an order pursuant to s. 47 of the Act to discharge the HMI liens, or in the alternative, to post reduced security to vacate the liens pursuant to s. 44 of the Act.  On a motion to discharge or to post reduced security, the Owner – in this case, Index Energy – bears the onus of establishing that the amount set forth in the claim for lien is excessive[2].

At the motion, Index Energy successfully argued that HMI had no reasonable prospect of being able to prove a lien amount in excess of $13,872,154.86, plus HST.  The lien amounts were reduced and security to vacate under section 44 of the Act was to be posted accordingly.

The motion judge explained the method used to calculate the HMI lien as follows.  In calculating its lien amount, HMI took its total costs (labour, material equipment and amounts claimed by subcontractors) and added a 10% markup for profit (notwithstanding that profit was already accounted for in its fixed-price contract).  HMI then deducted the amounts paid by Index Energy, with the remaining balance forming the sum of HMI’s lien claim.

The motion judge held that, by using the “costs plus” approach HMI miscalculated its lien amount.  The motion judge explained that using the “costs plus” approach in the face of a fixed-price contract for services, duplicated the claim for profits which was already accounted for in the agreed-upon price under the contract.

HMI appealed the decision.


The Divisional Court Speaks

On appeal, the Divisional Court considered both a jurisdictional issue and a substantive issue regarding a reduction of the HMI liens.  The scope of this article is limited to a review the substantive merits of the appeal, particularly, whether the motion judge had erred by reducing the security required to vacate the HMI liens.

In upholding the decision of the motion judge, the Divisional Court confirmed that in a fixed price contract scenario, the price of the work is measured by the milestones for payment under the contract rather than the costs incurred by the lien claimant.  The Divisional Court explained that where a fixed price is in place, a contractor cannot claim extra charges for work already included (original scope work) in its claim for lien in the absence of approved change orders.  Doing so would negate the very risk that a contractor assumed when it entered into a fixed price contract.

The Divisional Court’s decision indicates that in calculating a lien, a contractor should separate its claim into silos for, among other things, contract work, approved outstanding extras and unapproved outstanding extras.  At paragraph 18, the Divisional Court applied a formulaic guide to calculating the lien amount, as follows:

  1. contract accounting;
  2. plus, extras (with amounts claimed for each extra, including the basis on which those claims were calculated);
  3. less, credits for contract work not done;
  4. less, acknowledged deficiencies (if any);
  5. plus, any other claims (such as delay costs).

Ultimately, HMI was fortunate that the motion judge did not exercise discretion to order costs against HMI pursuant to s. 35 of the Act, or perhaps more drastic, to discharge the liens entirely in the circumstances.

In light of the foregoing, we encourage lien claimants to exercise diligence and caution in determining the quantum of their lien claims.

 

This article was published in the May edition of the CCE Magazine


[1] HMI Construction Inc. v. Index Energy Mills Road Corp., 2017 ONSC 4075 (Div. Ct.) at para. 9 and Construction Lien Act, R.S.O. 1990, c C.30, s. 14(1).

[2] 1246789 Ontario Inc. v. Sterling (1999), 46 O.R. (3d) 72 (S.C.J.) at para. 21.