Background
Demikon Construction Ltd. (the “Plaintiff”) registered a lien for $5,035,812.66 with respect to a condominium project in Orillia, Ontario (“Project”), which was owned by Aurelia Limited Partnership and Oakleigh Holdings Inc. (the “Defendants”).
The Defendants vacated the lien by posting security of $5,085,812.66, being the full amount of the Plaintiff’s lien plus $50,000 as security for costs.
Demikon’s Motion to Reduce Security Based on Direct Payments to Subcontractors
In Demikon Construction Ltd v. Oakley Holdings Inc et al., 2024 ONSC 2151, the Defendants brought a motion under s. 44(5) of the former Construction Lien Act (the “Act”) to reduce the security they previously posted to vacate the Plaintiff’s lien.
The Defendants argued that they should be entitled to reduce the security in court because they made a series of payments to subcontractors who supplied to the improvement pursuant to s. 28 of the Act. Section 28 permits an owner, contractor or subcontractor to “jump a rung” of the construction pyramid making payments directly to a subcontractor and being credited for those payments. However, a direct payment will only be considered a s. 28 payment if it is made to a person having a lien for amounts owing to that person and cannot be used to reduce any holdbacks required to be retained by the payer. Section 28 of the Act provides as follows:
Where an owner, contractor or subcontractor makes a payment without obligation to do so to any person having a lien for or on account of any amount owing to that person for services or materials supplied to the improvement and gives written notice of the payment or the intention to pay to the proper payer of that person, the payment shall be deemed to be a payment by the owner, contractor or subcontractor to the proper payer of that person, but no such payment reduces the amount of the holdback required to be retained under this Part or reduces the amount that must be retained in response to a written notice of lien given by a person other than the person to whom payment is made. (emphasis added)
In response, the Plaintiff argued that s. 28 did not apply to the subcontractor payments because the subcontractors were not lien claimants.
The motions judge held that the payments should be applied to reduce the security. To reach that conclusion, the motions judge found that Aurelia had made direct payments without an obligation to do so “to subcontractors who either had a lien or had monies owing to them for services or materials supplied to the Project.” (emphasis added)
The Plaintiff’s Appeal
The Plaintiff appealed the motions judge’s decision to the Divisional Court, arguing that the motions judge erred because s. 28 only allows for payments to persons having a lien. The Plaintiff argued that, except for one of those payments, there was no evidence that the payments were made to persons having liens, and indeed that payments were made to subcontractors who did not have lien rights.
Additionally, the Plaintiff submitted that the motions judge erred by reducing the lien security due to the amounts paid to subcontractors for holdback. Section 28 specifically provides that direct payments do not reduce the holdback required to be retained by the payer.
Direct Payments Can Only Be Made to Subcontractors with Lien Rights
Justice Lococo, writing for the Divisional Court (2024 ONSC 6261), held that the motions judge made an extricable error in law in his interpretation of s. 28 of the Act, which applies only to payments to a person having a lien for any amount owing to that person. The motion judge erred in expanding the scope of s. 28 to include payments to those who do not have liens, who could theoretically include (1) subcontractors who supplied services that did not form part of an improvement and are therefore not lienable, or (2) subcontractors with expired lien rights.
Given that the court had found that the motions judge erred in his interpretation of s. 28 of the Act, the court declined to address any of the Plaintiff’s other submissions relating to payment of holdbacks.
Tips for Advising on Direct Payments Under Section 28
Demikon v. Oakleigh is both a cautionary tale and a helpful guide for navigating direct payments to subcontractors under s. 28 of the Act. Here are some key considerations for payors who are contemplating making a direct payment to a subcontractor pursuant to s. 28:
- The payment must be made to a person having a lien on account of amounts owing to that person (that person being the person who has a lien). The subcontractor must have supplied lienable services to the improvement and have live lien rights.
- The party making the direct payment must give notice to the proper payer. The Act requires that the party making the s. 28 direct payment give notice of the payment or the intention to make payment to the proper payer of the subcontractor receiving the direct payment.
- The direct payment will not reduce the holdback the payer is required to be retained. Section 28 payments cannot be used to reduce statutory holdbacks or amounts required to be retained pursuant to a written notice of lien.
- Consider obtaining a written acknowledgement from the proper payer prior to making a direct payment to its subcontractor.