Most construction disputes are about payment. Contractors and subcontractors have historically relied on liens to provide some security for non-payment.

Over the past several years, some Canadian provinces have introduced “prompt payment” legislation aimed at speeding up the payment process through legislated payment deadlines and the use of “adjudication” as a fast-tracked process for payment disputes. Under this process, parties to a dispute can apply to an Adjudicator, who will determine the amounts owing and make court-enforceable orders for payment.

This legislation raises a new and interesting problem—does a registered lienholder have priority over a party who has obtained an adjudication order? Can the two be reconciled? The Ontario Superior Court recently explored these issues in Okkin Construction Inc. v. Apostolopoulos.

Background

Peter Apostolopoulos (“Mr. A”) hired the Bond Group (“Bond”) as a contractor to construct improvements on his house. After some delays, Bond brought in Okkin Construction (“Okkin”) as a subcontractor.

The agreement broke down when the project went over budget. Mr. A refused to pay his invoices and terminated the contract. This sparked the following sequence of events:

1. Okkin registered a construction lien against Mr. A.’s property for $196,316.52 (the “Lien”)
2. On March 22, 2022, after Okkin had registered its lien, Bond filed a Notice of Adjudication under the Construction Act and an adjudication was held.
3. The Adjudicator ordered Mr. A to pay Bond $207,668.91 for unpaid invoices (the “Adjudication Order”).

Mr. A did not pay the full Adjudication Order. He was concerned that he would have to pay twice by both paying the order and the Lien. Okkin expressed concern that Mr. A would not be able to pay the balance of the Lien if he paid the Adjudication Order. Mr. A. applied to the Court seeking directions to pay the balance of the money into court to cover the Lien.

The Court held that it had no jurisdiction to vary the Adjudication Order, dismissed the motion, and ordered that the funds be paid to Bond pursuant to the Adjudication Order. In doing so, the Court discussed the issue of priority between the Adjudication Order and the Lien and held that the Adjudication Order should take priority in this case.

Adjudication Orders Take Priority Over Liens

In determining that the Adjudication Order should take priority, the Court noted that the purpose of Ontario’s prompt payment laws was to provide quick interim decisions that would allow money to “flow down the contractual pyramid” from owners to contractors to subcontractors.

The Court held that this “flow down the pyramid” could be achieved through trust provisions in the Ontario Construction Act. These trust provisions require contractors to hold funds received for the price of an improvement in trust for the benefit of all subcontractors and other service providers who have worked on the improvement.

In this case, Okkin was the only subcontractor. Under the trust provision, the Court held that Bond would become a trustee for Okkin once Mr. A. paid Bond the amount owed under the Adjudication Order. Bond would not be entitled to retain any funds from the Adjudication Order for itself until Okkin had been paid for its services and materials – in other words, until Bond had fully satisfied its obligations as trustee.

Using this interpretation, the Court expedited the flow of funds while addressing both Okkin’s and Mr. A’s concerns. Okkin would be paid for the Lien through the Construction Act trust provisions. Mr. A would get credit for the payment and would not have to “double pay” Okkin for the Lien and the Adjudication Order.

Takeaways

Given that prompt payment and adjudication in Alberta is in its infancy under the Prompt Payment and Construction Lien Act, it will be interesting to see if this issue arises in Alberta, and how the Alberta courts interpret similar facts. While Alberta’s prompt payment and adjudication provisions are based heavily on Ontario’s Construction Act, one major difference exists between the provinces: the extent of trust provisions. 

In Ontario, a contractor who receives payment from an owner holds those funds in trust for subcontractors who performed work for the contractor. In contrast, in Alberta, a trust only arises when a certificate of substantial performance is posted. Any funds received by the contractor from the owner after the date the certificate is posted are trust funds for the benefit of subcontractors. Any funds received by the owner before that date are not subject to any trust requirements. 

As a result, the underlying trust obligations of Bond to pay Okkin would only arise in Alberta if Bond had posted a certificate of substantial performance. If that had not occurred, then a court directing Mr. A to pay Bond would provide no certainty to Okkin that it would receive payment. Bond would not receive the funds as trustee. While it would still be required by contract to pay Okkin, the absence of trust obligations on Bond would significantly weaken Okkin’s position. 

Contact Anthony Burden or Jared Hubbard from Field Law’s Calgary office, or Ryan Krushelnitzky from Field Law’s Edmonton office, with any questions related to this case or the Prompt Payment and Construction Liens Act. 

Link to decision: Okkin Construction Inc. v. Apostolopoulos, 2022 ONSC 6367