Registering a construction lien against a property is a significant remedy that immediately triggers certain obligations and responsibilities for an owner. For that reason, the Construction Lien Act, 1990, c. C. 30 places an obligation on the party that is registering the lien to ensure the lien amount is accurate and not inflated.
A recent decision released by the Ontario Superior Court of Justice (Divisional Court) called HMI Construction Inc. v. Index Energy Mills Road Corp., highlights the pitfalls for a lien claimant in overstating its lien amount. In HMI Construction Inc. v. Index Energy Mills Road Corp. the owner purchased an energy generating plant. HMI was hired by Index to update the building and convert it into a biomass fired cogeneration facility. A falling out occurred between the parties and HMI registered two liens in the total amount of $32,807,468.11 against the property.
Index disputed the lien amount and elected to cross examine HMI’s affiant on the lien. It was determined that HMI used a “costs plus” approach in calculating that quantum of the lien amount. In essence, HMI calculated is actual costs, materials, equipment and labour and then added a 10% markup for profit to reach $32,807,468.11. The problem with this approach was that HMI and Index were on a fixed price contract. The court determined that absent approved changed orders, a contractor cannot include in a claim for lien extra charges over and above the contract amount, despite the fact that the contractor’s costs were more than usual or expected. After reviewing the fixed price contract, and HMI’s progress draws, the Divisional Court affirmed the lower court’s determination that the maximum lienable amount was $13,872,154.86. As a result, HMI was found to have exaggerated its lien amount by $19,000,000. Index was successful on the appeal, and only had to post $13,872,154.86 as security in order to vacate the liens. Index was also awarded costs of the lower court motion and the appeal.
It is noteworthy that the Divisional Court ruled that “HMI is fortunate indeed that the motions judge exercised his discretion not to discharge the liens entirely, given all the circumstances.” Accordingly, it needs to be highlighted that if lien claimants are haphazard in calculating their lien amounts, the court has discretion to discharge the lien entirely if it is improperly inflated. Additionally, pursuant to section 86 of the Construction Lien Act, a party (or that party’s lawyer) can be ordered to pay a severe cost award if found to have willfully exaggerated the amount of its lien. The lesson here is that caution and care needs to exercised when calculating a lien amount. Lien claimants should consult with knowledgeable counsel in order to ensure the lien is properly calculated, otherwise, they run the risk of unwittingly losing their lien rights or making themselves vulnerable to an adverse cost award.
Jeff Van Bakel
Advocates LLP
Jeff practices predominantly in construction litigation, professional negligence defence and commercial litigation. Jeff takes pride in providing advice to his clients aimed at finding solutions. When a resolution cannot be reached, Jeff regularly appears before the Superior Court of Justice, the Divisional Court and the Court of Appeal for Ontario and aggressively advocates on behalf of his clients’ interests.
Tags: Construction Lien Act, liens