The case of HMI Construction Inc. v. Index Energy Mills Road Corp., 2017 ONSC 4075 (Div. Ct.), serves as a good example of why lien claimants need to carefully determine the amount of their lien before registering their claim for lien. Index Energy bought an energy production facility that was originally built in 1941 with a plan to retrofit and replace the existing plant with a biomass fired cogeneration facility that would supply steam to industrial clients and generate electricity for sale into the power grid. In December 2012, Index Energy entered into a fixed price engineer, procure and construct contract with HMI. Work commenced shortly after execution of the EPC contract, however, disputes arose between HMI and Index Energy. On May 1, 2015, Index Energy issued notices of default to HMI and on May 19, 2015, Index Energy informed HMI of its decision to take over plant operations despite the work under the EPC contract not being completed. On July 28, 2015, HMI was advised of the decision by Index Energy to terminate the EPC contract as a result of HMI’s default.
HMI registered two construction liens totalling $32,807,468.11. The defendant Index Energy brought a motion to discharge the two liens and alternatively to post a reduced amount of security for the liens. The motions judge held that HMI had no reasonable prospect of proving a lien claim in excess of a maximum lienable claim amount of $13,872,154.86 plus HST, and therefore, rather than discharge the liens, reduced the amount of the security to be posted to vacate the registration of the claims for lien from title to the maximum amount. HMI appealed the result to the Divisional Court, which dismissed the appeal of HMI.
In order to fully appreciate the result in this case, it is important to understand the underlying facts regarding the calculation of HMI’s lien amount so that statements made by the motions judge and endorsed by the Divisional Court are not taken out of context.
The evidence on the motion was an affidavit of HMI’s administration manager, on which she was cross examined. First HMI totalled all of its costs on the project for material, equipment, and labour including amounts claimed by its subcontractors. Then HMI added 10% profit, which ignored the fact that profit was already in the fixed price contract amount. HMI then deducted the amounts paid from Index and the balance owing under this cost plus approach became the amount claimed in the HMI liens. HMI’s administration manager also refused to answer questions that essentially asked whether HMI’s lien was calculated based on a cost plus approach and the court drew an adverse inference from her refusal to answer these proper questions.
In determining that HMI was not entitled to calculate its lien on this basis with respect to a contract that was a fixed price and that included terms for changes in the work and claims, the court stated:
With a fixed price contract, in the absence of approved change orders, a contractor cannot include in a claim for lien extra charges for the work included in the fixed price contract simply because costs were more than usual or anticipated when the fixed price contract was signed. When a party signs a fixed price contract, the party assumes risks of cost changes.
The above statement, if taken out of context, could lead to a misunderstanding of the HMI case. The court did not disallow all liens because unapproved or disputed extras are included in the lien calculation, which is clear from the Divisional Court decision. The statement above only refers to charges by a contractor for work that is in the original scope. Simply stated, there is a base price and a base scope of work associated with that price, and that should be the starting point of the lien calculation.
The court set out seven reasons whey the cost plus approach was inappropriate in this case for calculating the lien. The court articulated the third reason as follows:
Thirdly, HMI could have liened for disputed amounts owing pursuant to the original contract and for disputed work that was not included in the original contract (extras). Index and HMI had agreed to an approach for valuing payment of extras that was different than for work that was included in the original scope of the fixed price contract. However, HMI’s “cost plus” approach did not differentiate between the original contract work and extras. All work was valued using the same “cost plus” basis, whether that work was part of the scope of the original fixed price contract or whether the work was an extra.
Therein lies the problem with the calculation of the value of the HMI liens; HMI did not differentiate between the costs incurred to complete the original scope of work and its claims. Typically, when the value of a lien is calculated, the amounts are put in buckets, such as approved and unpaid extras, unapproved or disputed extras or amounts for additional compensation arising from delays, as a few examples. The lower court found that the cost plus approach by HMI significantly exaggerated the amount of its liens.
The matter was appealed to the Divisional Court, which as noted above, dismissed the appeal. The Divisional Court articulated the proper manner for itemizing a claim:
- Contract accounting
- Plus extras with amounts claimed for each extra, including the basis on which those claims were calculated
- Less credits for work not done
- Less acknowledged deficiencies (if any)
- Plus any other claims (such as delay costs).
This formulaic approach by the Divisional Court, although perhaps not complete in its description, does however serve as a good guide to calculating the value of a lien.
Justice Corbett , writing for a unanimous Divisional Court, stated that “I would have expected properly completed Scott Schedules to account for HMI’s lien claim in the manner I have described above.” A party, therefore, when preparing the calculation of its lien value should prepare a Scott Schedule setting out the items in the claim for lien and the value for each item. Maintaining such a written record will no doubt assist a party in the event that the party is cross-examined on its lien.