Ontario – court defers to arbitrator court’s discretion to release statutory deposit of court costs for lien litigation – #119

In Man-Shield Construction Inc. et al. v. 1876030 Ontario Inc. et al., 2018 ONSC 5231, Mr. Justice F. Bruce Fitzpatrick deferred to an arbitrator the exercise of the court’s discretion to release monies deposited into court as security for costs in lien litigation under Ontario’s Construction Act, RSO 1990, c C.30.  In light of the parties’ submission to arbitration, Fitzpatrick J. held that the discretion to determine the amount of those costs and their release now rested with an arbitrator, despite that the Construction Act expressly granted that discretion to the court.

The parties’ dispute involved a new waterfront hotel construction project in Thunder Bay. Disagreements prompted Man-Shield Construction Inc. and Man-shield (NWO) Construction Inc. (“Plaintiffs”) to register a January 2015 lien against the hotel project. To unencumber title to that project, 76030 Ontario Inc. and T.B. Properties (“Defendants”) made a deposit into court under section 44(1)(d) of the Construction Act. That provision allows any person to apply for a court order vacating registration of a lien claim and any certificate of action in respect of that lien by paying into court two amounts: (a) the full amount claimed as owing in the claim for lien; and, (b) security for costs calculated as the lesser of $250,000 or 25% of the amount of claim.

In its dispute, Defendants deposited $1,435,610.00, including $50,000.00 as security. After having resolved two (2) sub-trade liens, the balance totalled $1.2 million.

After having commenced litigation, the parties undertook arbitration of their lien litigation. (It is unclear whether the parties had agreed to arbitrate when they first contracted or later, as a submission agreement, after the dispute arose. The reasons for decision do not reproduce the wording of the agreement to arbitrate). During the arbitration, they added a second dispute (the “Condominium Project”) for the arbitrator to decide. That dispute stemmed from a different contract but between the same parties.

On April 24, 2018, the arbitrator released a partial award in which he determined the quantum of Plaintiffs’ entitlement to payment of certain construction services and materials for the Hotel Cycle. Plaintiffs and Defendants agreed that the amount ordered by the arbitrator, with adjustments, totalled $211,110.48. By doing so, the arbitrator resolved the initial lien dispute which had justified Defendants’ deposit into court. The award left unresolved the issue of interest and costs as well as Defendants’ counterclaim.

On the same day he issued his award, the arbitrator invited the parties to provide submissions on interest and costs of the Hotel Cycle arbitration covered by his partial award. A few weeks later, as Fitzpatrick J. observed, the “arbitrator then changed his mind”.

By June 15, 2018 e-mail, the arbitrator advised the parties that he would defer his costs determination of the Hotel Cycle to the conclusion of the arbitration. The arbitrator explained that he considered that the Hotel Cycle and the Condominium Project were one undertaking though subject to two different contracts. As such, he viewed the Hotel Cycle and the Condominium Project as two parts of a single phase, Phase II, of the arbitration. The arbitrator’s fuller reasoning appears at paragraph 6 of Fitzpatrick J.’s decision.

Defendants objected. They applied under section 44(5) of the Construction Act for a court order directing payment out of court of the cash deposit they had earlier paid into court under section 44(1). The legislation expressly mentions that the decision to release the deposit is to be made by “the court” which section 1(1) defined as “the Superior Court of Justice”.

“44(5) Where an amount has been paid into court or security has been posted with the court under this section, the court, upon notice to such persons as it may require, may order where it is appropriate to do so,
(a) the reduction of the amount paid into court, and the payment of any part of the amount paid into court to the person entitled; or
(b) the reduction of the amount of security posted with the court, and the delivery up of the security posted with the court for cancellation or substitution, as the case may be.”

In their application, Defendants argued that Plaintiffs’ recovery of sums from the $1.2 million deposit in court was capped by the arbitrator’s award to $211,110.48. As the only remaining issue was Defendants’ counterclaim, the amount due to Plaintiffs could not go higher they argued. Defendants therefore asked that the court order: (a) payment out to Plaintiffs of the $211,110.48; (b) retention of $50,000.00 as security for costs with accrued interest, estimated at $31,000.00; and, (c) payment out to Defendants of the balance of $1,007,499.52.

Plaintiffs resisted the payment out, asserting that Defendants’ motion was premature. Plaintiffs also filed evidence that Defendants’ hotel project was fully encumbered leaving no equity to cover any award for costs in excess of the statutory amount met by Defendants’ deposit.

Fitzpatrick J. observed that neither of the parties had any case on point and that they had cited lien litigation case law by analogy. Plaintiffs pointed to two (2) post-trial disputes over court costs in lien litigation in which the court Masters, in order to satisfy an award for costs in the court lien litigation, had comingled amounts deposited for the lien and for court costs. See Carter Tile Contractors Inc. v. Ben-Zvi, 2005 CanLII 42482 and, D’Urzo Demolition v. Damaris Developments Inc., 2012 ONSC 3938, 15 C.L.R. (4th) 229.

In both cases, (a) the amount awarded by the court on the merits for the lien turned out to be less than the amount deposited in court as security for the lien but (b) the amount awarded by the court for court costs was less than the amount deposited in court for costs. In D’Urzo Demolition v. Damaris Developments Inc., the Master ordered that the amount left over from the security for the lien be applied to cover the shortcoming in the amount left for the costs. The Master stated his reasoning as follows:

It would be unfair for the court to permit an owner to vacate a lien using a method that prejudices the lien claimant’s ability to have its adjudicated award satisfied. The interpretation that is just and reasonable in the circumstances is one that renders the award more than a paper judgment.

Fitzpatrick J. agreed that Defendants’ application was premature. He accepted that the arbitrator’s work was ongoing and each party had a competing argument to the costs held by the court.

Fitzpatrick J. distinguished the parties’ case law by observing that, contrary to the cases submitted by the parties, he as a Superior Court judge was not asked to adjudicate the merits of the lien dispute and then decide how to allocate costs incurred by litigating that lien dispute. Rather, the arbitrator was responsible for doing so. Fitzpatrick J. further held that he was not well placed to anticipate what would be the actual costs award.

I have no way to accurately assess the relative positions of the parties as to the costs that may be awarded arising from the partial award that the arbitrator has recently made. In general, based on the evidence placed before me on this motion, I expect the costs portion of the “Hotel Cycle” will exceed the statutory maximum of $50,000.00. However, it is an open question who in fact will be the recipient of costs. It is a question that the arbitrator has now determined will be left to the end of the entire process.

Fitzpatrick J. underlined the statutory limitations of judicial involvement in arbitration under Ontario’s Arbitration Act, 1991, S.O. 1991, c. 17.  He also pointed to his own prior decisions, in the same area of disputes, to hold the parties to their bargain as well not allow their bargain to interfere with others’ court access.

[16] The parties agreed to arbitrate their disputes. I give deference to this agreement. I am cautious about unduly interfering with this private process. I am alive to the statutory direction given to courts in respect of private arbitrations by s. 6 of the Arbitration Act, 1991, S.O. 1991, c. 17. I have written about all these considerations in previous decisions not to stay the arbitration proceedings between these very parties (see Man-Shield (NWO) Construction Inc. v Allure Condominiums LP, 2017 ONSC 3479) and a decision not to stay the court proceeding between the plaintiffs and other sub-trades with respect to the projects at issue on the Thunder Bay waterfront (see Steelrite Construction Canada Inc. v. Man-shield (NWO) Construction Inc., 2017 ONSC 2303 (CanLII), 279 A.C.W.S. (3d) 685). I find the process regarding the hotel is still ongoing.

Fitzpatrick J. deferred to the arbitrator’s authority to postpone a determination of costs until a full resolution of the Condominium Project dispute. Though sympathetic to Defendants’ financial situation, Fitzpatrick J. expressly held that their financial situation was insufficient to exercise his judicial discretion to order the release any of the security deposited under the legislation “at least to the extent that any judicial discretion is really available on this specific issue given the matter is being privately arbitrated.

He held back exercising the discretion of the court in section 44(5) of the Construction Act because of the parties’ agreement to arbitrate their decision. Doing so endorsed the parties’ agreement to arbitrate as a full answer to who would now decide access to the costs deposited. Fitzpatrick J. accepted that the parties had agreed that an arbitrator and not a court would exercise that discretion.

[23] Correspondingly, I am not prepared to allow any of the security to be released to the plaintiffs except on the express consent of both parties following their consideration of this decision. I do this because I see the arbitrator as ultimately being tasked with determining how the security is be allocated once all the issues of quantum and costs have been determined between the parties.

Note: It is possible that costs granted by an arbitrator may be on a higher scale than those granted by a court. For example, a court looks to the guidance set out in Rule 57.01 of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194 and the established court Tariffs.  Rule 57.01 lists various considerations the court may consider, in addition to the result in a proceeding and any written offer to settle or contribute, when exercising its discretion to decide on a costs award under Section 131 of Ontario’s Courts of Justice Act, RSO 1990, c C.43.

Rule 57.01(3) stipulates that when the court awards costs, it shall fix them in accordance with sub-rule (1) and the Tariffs (aside from exceptional cases set out in Rule 58). Rule 57.01(4) does allow the court to award all or part of the costs on either a substantial indemnity basis or in an amount that represents a full indemnity. In Ontario “substantial indemnity costs” means an amount that is 1.5 times what would otherwise be awarded by Part I of Tariff A.

In principle, Fitzpatrick J.’s decision allows an arbitrator to issue a costs award but does not expressly subject that award to the Rule 57.01 considerations or a particular Tariff. Given the gap between the initial lien claim of $1.2 million and the ultimate award of $211,110.48, the arbitrator in the present case may well grant less costs in light of Plaintiffs’ divided success. Defendants’ potential for success on their counterclaim may further affect the amount of costs, up or down. That aside, Fitzpatrick J.’s decision to defer the court’s discretion to the arbitrator allows the possibility in other cases that a resulting costs award may grant full indemnity. The arbitrator may allow a party to draw on a deposit into court calculated according to standards of indemnity not controlled by the Construction Act or Rule 57.01.