Ontario’s Construction Act provides that a court can impose costs liability on a lawyer in certain circumstances. When are lawyers personally liable for preserving or perfecting a lien? Should a lawyer be liable if they register a lien which they objectively should have known was without foundation or wilfully exaggerated? Or must a lawyer subjectively know the lien was bad to be liable? Can a lawyer be liable where they recklessly, or with wilful blindness disregard facts establishing that they are preserving and perfecting a bad lien? Good questions, however, there was surprisingly little caselaw in Ontario addressing these issues.
These questions were recently answered in Viceroy Homes v. Jia Development Inc, 2024 ONSC 1608, (the “Superior Court Decision”). Associate Justice Wiebe held that the test for lawyers’ liability for preserving or perfecting a bad lien is subjective. The Superior Court Decision was appealed. In JIA Development Inc. v. 2708320 Ontario Ltd. (Viceroy Homes), 2024 ONSC 6519 (the “Divisional Court Decision”), the Divisional Court held that leave was required to appeal the Superior Court’s decision on costs pursuant to s. 86(1) of the Act. The Divisional Court denied leave.
KEY TAKEAWAYS
(1) For a lawyer (or other representative) who preserves or perfects a lien to be held personally liable for costs under s. 86(1)(b)(i) of the Construction Act, the lawyer must subjectively know that the lien is without foundation, frivolous, vexatious, an abuse of process or for a wilfully exaggerated amount at the time of preservation or perfection, or have been reckless or wilfully blind to the defects in the lien.
(2) Leave is required to appeal a costs order made under s. 86 of the Construction Act.
THE VICEROY HOMES CASES
The underlying lien claim
Viceroy Homes instructed their lawyers to register a claim for lien in the amount of $3,310,000 for 39 days of work. Viceroy’s principal provided their lawyers with a copy of a signed contract for $20 million in work to be done within eight months in which Viceroy was exposed to liquidated damages of $50,000 per day of delay. But the contract also stated that construction costs were not to exceed $500,000 until a collateral transaction concerning the project lands was finalized; that transaction was never completed, so the condition remained unfulfilled.
Viceroy’s lawyers received from Viceroy a breakdown of the $3.3 million in work it allegedly performed for the defendants. The lawyers questioned why the price of the work exceeded the $500,000 cap when the condition was not fulfilled, and Viceroy’s principal explained that there had been a subsequent unsigned agreement for a higher cap and that Viceroy had been instructed by the defendants to perform the work. Viceroy did not supply any further supporting documents before the lien was preserved. Viceroy’s principal only showed Viceroy’s lawyers chat messages between him and the defendant’s principal on his phone.
Viceroy’s lawyers sent to Viceroy’s principal an authorization and direction form with the draft lien attached. He signed and returned the form, and the lawyers registered the claim for lien.
After preserving Viceroy’s lien, Viceroy’s lawyers pursued Viceroy’s principal for supporting documents to substantiate the lien before perfecting it. Viceroy’s lawyers requested, amongst other documents, contracts, correspondence, invoices, pictures, and videos. Viceroy’s principal repeatedly promised he would provide the supporting evidence but delayed in doing so. He met with one of Viceroy’s lawyers at a coffee shop and showed her videos, pictures of the work, and chat messages with the defendant’s principal on his phone. He promised to send these recordings and more, but he did not follow through.
Faced with the impending deadline to perfect the lien, Viceroy’s lawyers proceeded to prepare a statement of claim and send the claim to Viceroy’s principal who reviewed it and gave comments which were incorporated into the claim. The lawyers again asked for Viceroy’s supporting documentation, but Viceroy’s principal failed to provide it. With time running out, the lawyers had the statement of claim issued and, at Viceroy’s principal’s instruction, served the claim on the defendants.
Shortly after, Viceroy’s lawyers received a letter from one of the defendants’ counsel saying that the work Viceroy claimed it had done had not been done at all. The defendants said Viceroy’s claim for lien was frivolous, vexatious, and abusive. They demanded that the lien be discharged, otherwise the defendant would initiate a cross-examination under s. 40 of the Act.
Viceroy’s lawyers sought Viceroy’s instructions on the letter. Viceroy’s principal denied the allegations, insisted that he would provide proof of the claim, and said he was willing to attend cross-examination. The lawyers again sought from Viceroy documentary corroboration of its claim. In response, Viceroy’s principal sent materials receipts, a signed subcontract, and chat messages with a would-be project manager.
Viceroy’s principal was eventually cross-examined after the cross-examination had been postponed twice at his request. On cross-examination, it came to light that the defendants were right—Viceroy had not done large parts of the work described on Viceroy’s claim for lien.
Viceroy’s lawyers advised Viceroy that some of its lien, at the very least, was indefensible. The lawyers emphasized the importance of delivering corroborating evidence and answering the undertakings to support the remainder of the lien. Viceroy’s principal promised to provide that.
The defendants then gave Viceroy’s lawyers notice of a motion to discharge Viceroy’s lien. After further attempts to obtain supporting documentation from Viceroy’s principal, it became clear to Viceroy’s lawyers that Viceroy could not substantiate its lien. The lawyers strongly advised Viceroy to voluntarily discharge the lien before the defendants’ motion or they would take themselves off the record. Viceroy did not give instructions to voluntarily discharge the lien, so Viceroy’s lawyers removed themselves from the record before the defendants’ discharge motion was heard.
Associate Justice Wiebe heard the motion. Viceroy was now unrepresented and did not attend the hearing of the motion, which proceeded uncontested. The associate justice held that Viceroy’s lien was indeed frivolous, vexatious and an abuse of process. He ordered that the lien be discharged. He then ordered that Viceroy’s principal should pay the defendants’ costs on a substantial indemnity basis along with Viceroy.
The defendants’ motion for costs against the lien claimant’s lawyers
The defendants then brought a motion for the court to order that Viceroy’s lawyers pay costs to the defendants pursuant to s. 86 of the Act. They argued that Viceroy’s lawyers should have known the lien was frivolous because of the high value of the lien for the short duration of work, because Viceroy exceeded the $500,000 cap stated in the signed contract, and because of the paucity of supporting documentary evidence provided by Viceroy to their lawyers at the time of preserving and perfecting the lien. The lawyers, the defendants argued, had a duty as a gatekeeper to avoid registering bad liens, and they failed in that duty.
The statutory language
The motion decision revolved around the language of s. 86(1)(b)(i) of the Act:
Costs
86 (1) Subject to subsection (2), any order as to the costs in an action, application, motion or any other step in a proceeding under this Act is in the discretion of the court, and an order as to costs may be made against, […]
(b) a person who represented a party to the action, application or motion, where the person,
(i) knowingly participated in the preservation or perfection of a lien, or represented a party at the trial of an action, where it is clear that the claim for a lien is without foundation, is frivolous, vexatious or an abuse of process, or is for a wilfully exaggerated amount, or that the lien has expired,
[emphasis added]
The Superior Court Decision
Associate Justice Wiebe held that no order for costs should be made against Viceroy’s lawyers because:
(a) For costs to be ordered against the lawyers, they must have actual knowledge or be reckless or willfully blind to the baselessness of Viceroy’s lien;
(b) There was no evidence that the lawyers subjectively knew the Viceroy lien was baseless when it was preserved and perfected, and that point was not disputed; and
(c) There was simply nothing that indicated a high risk that the Viceroy lien was groundless.
The Appeal to the Divisional Court
The defendants appealed. They argued that:
- Leave was not required to appeal the Superior Court Decision on costs. They argued that s. 86 of the Construction Act made the entitlement to costs a substantive issue, not interlocutory. They relied on s. 71 of the Construction Act, which provides that an appeal lies to the Divisional Court from a judgment under that Act, to argue that they could appeal the decision as of right.
- The lien claimant’s lawyers had a duty as a gatekeeper to determine whether their client’s lien was valid, and they failed to do so. They argued that Viceroy’s lawyers ought to have known the lien was frivolous and without foundation and that Associate Justice Wiebe was wrong in holding that s. 86 required the lawyers to subjectively know the lien was bad to be personally liable for costs for registering a frivolous, baseless or exaggerated lien.
LawPro counsel argued for Viceroy’s lawyers that leave was required to appeal the Superior Court Decision because s. 133(b) of the Courts of Justice Act stipulates that leave is required to appeal discretionary costs orders. By the express words of s. 86, the order was a discretionary costs order. Section 71 of the Construction Act, LawPro counsel argued, was not inconsistent with s. 133 of the Courts of Justice Act because s. 133 dealt specifically with costs orders, while s. 71 related to appealing judgments to the Divisional Court, generally.
On the substantive issue, LawPro counsel argued that the test for lien representatives’ liability under s. 86(1)(b)(i) was subjective for three reasons:
- The language “knowingly participated” in s. 86(1)(b)(i), in its entire context, could only be reasonably construed as subjective knowledge;
- The caselaw interpreting s. 86; and
- Good policy and the wider law on balancing lawyers’ duty to their clients and to the court.
The Divisional Court’s decision
Justice O’Brien gave the judgment of the Divisional Court, with Justices McSweeny and Davies concurring.
The Divisional Court agreed with LawPro counsel; leave was required.
Section 133(b) requires leave to appeal the discretionary costs order and nothing in the Construction Act is inconsistent with that provision. Section 71 of the Construction Act relates to a “judgment” and Rule 1.03 of the Rules of Civil Procedure defines a judgment as “a decision that finally disposes of an application or action on its merits.” The Divisional Court held that the costs order did not constitute a judgment because it was an order that followed the result in the lien proceeding and not a separate action or application.
Further, s. 71 of the Construction Act does not address costs, whereas the Courts of Justice Act expressly requires leave be obtained from an order only as to costs that are in the discretion of the court. Subsection 86(1) of the Construction Act states that costs under that provision are “in the discretion of the court”.
COMMENTS
Lawyers’ liability when registering liens
Associate Justice Wiebe’s decision in Viceroy Homes, expands upon Master Albert’s decision in Brian T. Fletcher Construction Co. Ltd. v. 1707583 Ontario Inc., 2009 CanLII 81402 (Ont Sup Ct) (“Fletcher”), the leading case on lien representatives’ liability when preserving and perfecting liens.
The Superior Court Decision in Viceroy Homes makes it clear that the standard for liability of lien representatives when preserving and perfecting liens is not mere negligence. Negligence involves an objective standard, but s. 86(1)(b)(i) imports a subjective test.
Lawyers should take note, however, that while actual knowledge that a lien is baseless or wilfully exaggerated is an essential precondition to a costs order against a lawyer for preserving or perfecting that lien, actual knowledge could be imputed if the lawyer is reckless or wilfully blind to major issues with the lien. Recklessness or wilful blindness requires a level of knowledge that is the moral equivalent of actual knowledge. While such conduct is well beyond mere negligence or laziness underlying a failure to inquire, Associate Justice Wiebe said recklessness and wilful blindness involves knowledge of an actual risk that is at the level of a “clear probability” and then a failure to act to avoid the risk or make inquiries.
Associate Justice Wiebe’s comments on recklessness and wilful blindness are the first commentary in Ontario jurisprudence on the applicability of the judicial concepts of recklessness and wilful blindness to a costs determination under s. 86(1)(b)(i). Counsel undertaking a retainer for a lien claimant will need to be mindful that they do not “turn a blind eye” to facts that would lead the lawyer to understand that the lien is without foundation or exaggerated. Otherwise, counsel risk liability for costs due to such reckless or wilfully blind conduct.
The authors believe that the Superior Court Decision is consistent with good policy. It aligns with the general principle that an order of costs should only be made against a lawyer rarely and only where serious misconduct has been shown. As Master Albert observed previously in Fletcher, putting lawyers at risk of costs orders against them personally would have a chilling effect on the lawyer-client relationship; the presumption is that the lawyer followed the client’s instructions.
Lawyers could be liable to their clients for failing to preserve the client’s lien rights in time. There are strict statutory deadlines for preserving and perfecting liens. To preserve their client’s rights in time, lawyers may sometimes have to register liens without the benefit of perfect information.
However, it would be a mistake to conclude that Viceroy Homes had diminished the lawyer’s gatekeeping role. Lawyers should require supporting documentation from their clients at the earliest opportunity, then assess the validity of the lien with reasonable diligence and promptness and advise their clients accordingly. If a client has misled their lawyer into registering a bad lien, the lawyer should advise the client that the lien may have to be voluntarily discharged, or the lawyer may have to take steps to remove themselves from the record. If a lawyer becomes aware of facts that, unless ignored, would lead them to conclude that their client has misled them into registering a bad lien, it is time to contact their insurer, or risk exposure to liability for costs arising from reckless disregard of a lien they would know to be without foundation but for their wilful blindness. These are all elements of the important gatekeeping role of a lawyer acting for a lien claimant.
Leave to appeal costs orders
The Divisional Court Decision now makes it clear that leave is required to appeal costs orders made under s. 86 of the Act. Although only s. 86(1)(b)(i) was at issue in Viceroy Homes, the Divisional Court’s ruling, in our view, will apply to all costs orders made under s. 86 because, by the express words of that section, s. 86 orders are in the discretion of the court. Section 133(b) of the Courts of Justice Act stipulates that leave is required to appeal all discretionary costs orders. The Divisional Court Decision also reinforces the position that a costs order is not a substantive “judgment”.
In the authors’ view the Divisional Court’s ruling requiring leave to appeal is a reasonable limit on the right to appeal a discretionary costs order made under s. 86 of the Construction Act. It would be odd if an action brought under the Construction Act was the only type of proceeding in Ontario Superior Court which allows discretionary costs orders to be appealed as of right. We believe this finding should be understood as confined to discretionary costs orders made under s. 86, and that this decision does not undermine precedent where the Court of Appeal has applied a broader definition of “judgment” for the purposes of s. 71 of the Construction Act in different context than a discretionary costs order.
CONCLUSION
The Superior Court Decision and the Divisional Court Decision in Viceroy Homes will be useful precedent on making and appealing costs orders against lien representatives going forward. We can expect that in future cases the issue will be to what extent counsel has recklessly disregarded or wilfully blinded themselves to facts that show that they are preserving, perfecting, or representing a lien claimant at trial, with a bad lien. Even though Viceroy Homes solidifies a subjective standard for lawyer liability when registering liens, lawyers should remain vigilant—an ounce of prevention is better than a pound of the cure.