Supreme Court Judgments

Supreme Court of Canada

Ken Gordon Excavating v. Edstan Construction, [1984] 2 S.C.R. 280

Date: 1984-10-11

Ken Gordon Excavating Limited Appellant;

and

Edstan Construction Limited, Ontario Mortgage Corporation and Ontario Housing Corporation Respondents;

and between

Ontario Housing Corporation Appellant;

and

Ken Gordon Excavating Limited, Ontario Mortgage Corporation and Edstan Construction Limited Respondents.

File Nos.: 17143 and 17132.

1984: May 16 and 17; 1984: October 11.

Present: Ritchie, Beetz, Estey, McIntyre, Chouinard, Lamer and Wilson JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Mechanics’ liens—Owner—Public works—Crown corporation selling land and holding mortgage—Project inspired by that corporation—Whether or not Crown corporation an “owner”—Whether or not project a “public work”.

Mechanics’ liens—Validity—Public works—Notice—Crown to receive notice of lien—Whether or not liens valid in absence of notice—Whether or not defect curable.

Mechanics’ liens—Priorities—Advances made under mortgage—Legal nature of advances—Whether or not liens payable out of monies advanced—Whether or not amount payable limited to statutory holdback—The Mechanics’ Lien Act, R.S.O. 1970, c. 267, (now R.S.O. 1980, c. 261), as amended by 1975 (Ont.), c. 43, ss. 1(1)(d), (da), 5(2), 11, 14, 18, 21a.

This appeal concerned the validity of a group of lien claims filed by suppliers against a small housing project undertaken by two Ontario Crown corporations, Ontario Housing Corporation (OHC), the Ontario Mortgage Corporation (OMC), and a now bankrupt builder, Edstan Construction Limited (E). The lien claims fell into two groups. Two claimants filed notice on OHC and OMC (as required where the project in question was a public work) in addition to filing their claim in the Registry Office. The remaining ten lien claimants only

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filed in the usual way in the Registry Office. The claims were asserted against OHC as a non-contracting owner, given E’s insolvency.

E bought twenty-five lots from OHC subject to an interest-free second mortgage held by OHC and representing the “primary principal” (capital invested) and the “remainder principal” (capital profit). The construction costs were covered by a first mortgage granted E by OMC. The arrangements were later amended by an agreement between OHC and E where the “primary principal” was deducted from the second mortgage and was to be financed through an increase in the first mortgage. Progress draws were to be authorized by Central Mortgage and Housing Corporation (CMHC) but the agreements did not stipulate how the draws were to be authorized or what expenses were to be covered by the draw. Sometime later, OMC and OHC entered an agreement where OMC undertook to secure and protect the interest of OHC, as its agent, for the “primary principal”; E was not a party to the agreement.

The work began well before the financial arrangements were registered but the project was abandoned shortly after the first draw for want of funds. OMC first deducted the “primary principal” for the lots involved and paid OHC and then paid the remainder to E. The second draw (made after the project was abandoned) was paid entirely to OMC. The twelve lien claims were filed and the two notices were given after E abandoned the project. OMC sold the property under its power of sale and by agreement held the proceeds pending the outcome of these proceedings. At issue here was (1) whether or not OHC was an owner as defined by the statute, (2) whether or not the project was a “public work” such that the Crown or crown agency involved was entitled to notice of a lien claim, (3) whether or not those with a valid claim were entitled to payment in full or only to the amount of the statutory holdback and (4) the legal nature of—and the legal consequences flowing from that characterization—the payments by OMC out of the proceeds of the first mortgage.

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Held: The appeal of Ken Gordon Excavating Limited should be allowed and the appeal of Ontario Housing Corporation should be dismissed.

Ontario Housing Corporation fell within the Act’s definition of owner under s. 1(1)(d). The arrangements between E and OHC and the similarity of that relationship to other cases where the Court found statutory “ownership” amply justified this finding.

The ten lien claimants cannot rely on the registered liens for a claim against the interest of OHC since this building project was a “public work” as defined in s. 1(1)(da). Notice to the Crown agency or ministry of government concerned was explicitly required by the statute and was an elementary and essential requirement to create and preserve the lien. The absence of notice was a breach of statute without judicial remedy. The two lien holders who did deliver notice, however, had valid and enforcable liens against OHC for the absence of an affidavit was a defect curable by s. 18.

The two lien claimants were entitled to the total claimed, and whether or not the claims exceeded the statutory holdback requirements of s. 11(7) was not determinative. Section 5(2), as enacted in 1975, did not limit persons claiming liens against a public work to the holdback provision of subss. 11(7) and (9), but rather invoked the whole of s. 11, including s. 11(6). If the amounts in question remaining in possession, or which should have remained in possession of the owners, exceeded the amount of the liens advanced in compliance with s. 21a, the lien claimants are entitled to payment in full.

The payments made by OMC to OHC were advances made under a building mortgage pursuant to the contractual direction of the mortgagor. These advances, made in the face of validly registered liens, were available to retire the claims of the lien claimants. E had been obligated to buy the lots from OHC and to pay for the combined land costs (capital cost plus capital profit). No document executed by OHC and E annuled this obligation. OHC had the right under the agreement to receive a mortgage from E in part payment of the price and to receive the balance in cash from E who, in turn, was entitled to raise that cash by way of an enlarged first mortgage from OMC. The agreement between OMC and OHC could not construct or reconstruct a transaction binding on E—E was not a party to this

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contract—which would deprive E of its right to receive the cash from the mortgagee on the first mortgage in order to retire the obligation to OHC as the vendor under the basic agreement. The documentation fell hopelessly short of that required to establish the transaction as the sale of an unregistered inchoate mortgage interest which, by the design of its principal actors, was never to come into existence.

Phoenix Assurance Co. v. Bird Construction Co., [1984] 2 S.C.R. 199; Northern Electric Co. v. Manufacturers Life Insurance Co., [1977] 2 S.C.R. 762; Hamilton (City of) v. Cipriani, [1977] 1 S.C.R. 169; Smith & Sons Ltd. v. May (1923), 54 O.L.R. 21; Dorbern Investments Ltd. v. Provincial Bank of Canada, [1981] 1 S.C.R. 459, referred to.

Macklem and Bristow, Mechanics’ Liens in Canada (4th ed. 1978), referred to.

APPEAL from a judgment of the Ontario Court of Appeal (1982), 133 D.L.R. (3d) 114, 36 O.R. (2d) 130, allowing an appeal by Ken Gordon Excavating Limited (in its individual capacity) and dismissing an appeal by Ken Gordon Excavating Limited (in its representative capacity) from ajudgment of the Divisional Court varying a judgment of Doyle J. Appeal allowed.

APPEAL from a judgment of the Ontario Court of Appeal (1982), 133 D.L.R. (3d) 114, 36 O.R. (2d) 130, dismissing an appeal by Ontario Housing Corporation from a judgment of the Divisional Court varying a judgment of Doyle J. Appeal dismissed.

Paul Leamen and Renée-Marie Barrette, for Ken Gordon Excavating Limited (in its representative capacity).

Tom Marshall, Q.C., and Leith Hunter, for Ontario Housing Corporation.

John Tavel, Q.C., and Robert Steinberg, for Ontario Mortgage Corporation.

Peter J. Bishop, for Ken Gordon Excavating Limited (in its individual capacity).

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The judgment of the Court was delivered by

ESTEY J.—This appeal concerns the validity of a group of lien claims filed by suppliers against a project undertaken by the Ontario Housing Corporation, a Crown corporation, (herein referred to as “OHC”) in association with a builder, now bankrupt, and the Ontario Mortgage Corporation, another Crown corporation, (herein referred to as “OMC”). The facts are rather complex, and while in the final analysis are not determinative of the legal issues, they are essential to an understanding of the legal problem and the isolation of the solutions. The defunct builder, Edstan Construction Limited (herein referred to as “E”), plays no part in these proceedings except that the personal judgment rendered against E remains outstanding, not having been appealed, and is in the amount of $136,319.10.

The lien claims fall into two groups:

(a) Two lien claimants, S. Henry & Sons Limited and Ken Gordon Excavating Limited, filed notices on the two Crown agencies, OHC and OMC, in addition to filing their claim for lien in the Registry Office in the ordinary manner prescribed by The Mechanics’ Lien Act, infra. The amount of these lien claims totals $54,900.01;

(b) The remaining ten lien claimants registered their liens against the lands of E in the usual way pursuant to The Mechanics’ Lien Act, R.S.O. 1970, c. 267, as amended by 1975 (Ont.), c. 43 (the “Act”), but did not give the notice required by that Act where the project in question is “a public work” as defined by s. 1(1)(da) of the Act. (The 1980 revision (R.S.O. 1980, c. 261) incorporates the 1975 amendments with new numbers. All references herein will be to the numbers as they were prior to 1980.) The total amount of the ten lien claims is $81,419.09.

The project concerns a small subdivision in the Ottawa region owned by OHC. Under the plan, as

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embodied in an agreement dated May 5, 1977, E would purchase the twenty-five lots from OHC by paying therefor by a second mortgage to OHC securing the total price of the lands. This price amounted to $670,500 and was made up of (a) the sum referred to as the “primary principal” of $350,930 which was the cost to OHC of acquiring and developing the land; and, (b) the sum referred to as the “remainder principal” of $319,570, the difference between the costs in (a) above and the agreed market value of the land. This mortgage was to become a second mortgage and called for no interest payments by E. The ultimate purchasers of the houses were required to pay the “remainder principal” without interest by a lump sum payment on the expiry of the mortgage, some thirty-three years hence. The “primary principal” was repayable with interest on an amortized basis over the life of this second mortgage.

By a further provision in the agreement between E and OHC, E was to arrange a first mortgage with OMC, or some other lender approved by OHC, for an amount not less than 95 per cent of the maximum selling prices of the houses themselves as stipulated in the agreement which was $625,740. The mortgage therefore was to amount to not less than $594,453. Thus the total sale price for all lots and houses when constructed was:

On August 9, 1977, OMC gave to E a mortgage commitment of $931,001.84 which was much in excess of the minimum specified in the agreement.

On August 22, 1977, after some correspondence between the parties, the agreement between OHC and E was amended so as to provide for the transfer from the second mortgage, to be granted by E to OHC, of the “primary principal” to the first mortgage by increasing the amount of the

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first mortgage accordingly. The agreement thereupon provided that:

…an amount equal to the primary principal sum for that parcel shall be deducted from the advances to the Builder on the first mortgage and paid to O.H.C….

OHC perhaps thereby intended to “sell” its second mortgage interest, represented by the “primary principal”, to OMC, but the legal mechanics adopted did not implement any such intent. As a result, the OMC mortgage now extended beyond construction financing and included the “primary principal”, being part of the land costs payable by E to OHC, in the amount of $350,930, and OHC held a second mortgage for the balance of the land costs payable under the agreement by E to OHC. The effect of the alteration to the agreement of May made in August was to accelerate the payment of the “primary principal” to OHC who would now receive it as cash on closing from E, or as later paid out by OMC on the direction of E, the mortgagor, from the principal secured under the OMC first mortgage.

The transaction became further complicated by two mortgage commitments issued by OMC in favour of E. The first commitment, issued on August 9, 1977, provided for a first mortgage of $931,001.84 which, as already observed, appears to be about $300,000 higher than the 95 per cent of construction cost specified in the basic agreement as the minimum first mortgage. This commitment was amended on August 22, 1977 so as to provide for the transfer of the “primary principal” from the second mortgage to the first mortgage, the avowed purpose being to consolidate in one mortgage all payments which bore interest and which called for repayment on a progressive basis during the term of the mortgage.

The plan established by the mortgage commitment was for progress draws to be advanced by OMC from time to time “as authorized by Central Mortgage and Housing Corporation” (“CMHC”).

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That Corporation was not a party to any of the mortgage commitments or to the basic agreement or to the amendment of the basic agreement. Significantly, OHC was also not a party to these mortgage commitments and the arrangements therein established. Specifically, there is nothing in any of the documents as to how the progress payments were to be authorized by CMHC or whether they were to include more than advances to be paid to the mortgagor, E, as E incurred costs in constructing the houses. Certainly, OMC was not connected to the “deemed” advances to OHC.

Construction commenced in June or early July 1977 and continued until E abandoned the project on October 7, 1977 when it was estimated that 25 to 30 per cent of the work had been completed.

On September 26, 1977, OHC transferred the twenty-five lots to E, and the first and second mortgages (actually charges) were registered under The Land Titles Act in favour of OMC and OHC respectively. After the abandonment of the project, the twelve liens or notices of lien were registered or delivered between October 18 and November 18, 1977.

Advances were made under the first mortgage by OMC to E as follows. On October 6, 1977, OMC advanced a total of $26,225 to E under the first mortgage. This represented progress payments authorized by CMHC on five lots amounting in all to $96,100. The amount paid over to E is the remainder, after subtracting from the authorized progress payments the sum of $69,875 representing the amount of the primary principal with reference to each of these five lots. This deduction of $69,875 was paid out by OMC to OHC by what appears to have been an intra-departmental cheque dated December 1, 1977. The actual cheque was in the amount of $69,870, the discrepancy of $5 being unexplained. I will return to the question of other payments made by OMC to OHC shortly.

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By another cheque dated November 1, 1977, the sum of $281,060 was likewise paid over by OMC to OHC. Again there appears to be no specific written direction from E authorizing this payment. In any event, it is clear from what little documentation appears in the record that these advances were made by the first mortgagee OMC in response to statements or certificates issued by CMHC, and dated between August 5 and October 4. The actual processing by the mortgagee appears, from these certificates, to have been on October 6 when the net amount above mentioned was, in fact, paid to E. No other moneys were ever paid out by OMC to E, or to anyone else on E’s direction. No witness from CMHC appeared to explain whether CMHC authorized construction advances only, as mentioned in the mortgage commitment, or whether CMHC authorized “land cost” advances, or some of each.

The evidence indicates that by September 26, CMHC had authorized advances totalling $286,585 (including the $96,100 mentioned above) with respect to twenty-one of the twenty-five lots. Unlike the practice followed in the case of the $96,100 authorization, no advance was paid to E with respect to these authorizations. Although the figure used in the judgments below was $286,785, the total of the net advances authorized by CMHC is $286,585. As there were no total authorized advances presented by witnesses or in the documentary evidence, the origin of this figure is unknown. The evidence indicates that some time later the sum of $281,060 was paid by OMC to OHC by cheque dated November 1, 1977. (There is no explanation of the discrepancy between the amount of the payment and the amount authorized.) Both of the aforementioned cheques passing between the two mortgagee corporations are drawn on the Royal Bank of Canada and are marked “not negotiable”. Presumably, these are the mechanics for the transfer intradepartmentally between these two corporations which are supervised by the same department of the government of the Province of Ontario. In any case, E received none of these moneys nor any moneys released by

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the CMHC authorization, although its total construction expenditures by that time amounted to approximately $167,448.02.

On October 7, 1977, about the time E received its advance of $26,225, E, for want of funds, abandoned the project. By that time, E had already entered into agreements of purchase and sale with twenty-five purchasers for these houses.

It is significant to note that between October 18 and November 18, 1977, all twelve liens were registered and notices in addition thereto were delivered by two of the lien claimants. It was after these dates of registration and delivery of notice that both payments, totalling $350,930, were made by OMC to OHC.

On October 24, 1977, OHC served notice on E that, by reason of its withdrawal from the project, OHC intended, should that default not be rectified within ten days, to enforce its rights under the parties’ agreement of May as amended in August. It is significant to note that OMC was not a party to that agreement, and hence was not a party to the notice, and that OHC did not follow through and enforce its default remedies under the agreement.

On December 2, 1977, OMC instituted power of sale proceedings under the first mortgage, alleging default in the payment of moneys due under the mortgage. This process was followed in respect of each lot independently. The amount alleged to be in default appears to be some unexplained part of the principal sum secured by each first mortgage, together with interest for an unspecified period of time, and “emergency winterization costs” plus “costs $750”. Each mortgage contained a clause requiring E, the mortgagor, to complete houses on each lot according to plans approved by OMC. Breach of this term is not specifically alleged in the various notices. The propriety of the sale proceedings, however, is not in issue before this Court in these proceedings. It also must be borne in mind that we are not here concerned with the rights and entitlements of E as against OHC, OMC or

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anyone else, save as those rights may bear upon the enforcement of the liens in these proceedings.

The crux of E’s financial problems is the apparent failure by the authorities in OMC and OHC, and perhaps in E, to define specifically in the agreement, the loan commitments and the mortgages, the mechanics for the payment by E to OHC of the purchase price on closing of the purchase of the lots by E from OHC, and the procedure for the making of the progress advances during construction, under the OMC first mortgage. By the reconstructed plan, E was to pay OHC for the twenty-five lots the same price, namely $670,500, by way of a second mortgage securing the sum of $319,570 representing OHC’s capital costs in these lands. The balance of $350,930, theretofore to be payable by E to OHC as part of the second mortgage, was now to be paid by E in cash which was to be received by E from OMC under the first mortgage. The reconstructed plan allowed E and OMC to increase the first mortgage by this sum of $350,930, and OMC would then presumably advance this money on the direction of E to OHC and thereby OHC would credit E with the payment of the balance of the purchase price of the lots. The documentation of this aspect of the transaction was hopelessly inadequate, and, in fact, when read literally and precisely, the documentation never reaches the problem. As to the advances to the paid to E under the first mortgage, CMHC, which was not a party to any agreement or documentation but was simply named in the mortgage commitments, was apparently not instructed as to how to authorize the payment on behalf of E of the $350,930 to OHC out of the OMC mortgage proceeds. Consequently, CMHC simply authorized advances as construction proceeded without any reference to the primary principal or land costs which had been transferred to the first mortgage and, of course, without any reference to the payee of such advances. The form delivered by CMHC appears to be directed to the authorization of progress payments as work proceeded. Conseqently, when OMC, presumably

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purporting to act under the terms of the revised mortgage commitment, directed the payments to OHC, they did so without reference to any authorization by CMHC relating to the payment of the primary principal or land costs by E to OHC under the revised plan. Why OMC divided one payment of the mortgage proceeds so authorized by CMHC between E and OHC, but not the other payment, is unexplained in the record. Why CMHC did not authorize advances for construction expenditures over and above “land costs payable to OHC” is likewise unexplained.

Before closing out this examination of these complex facts, it should be stated that, under the plan, both original and as finally adopted, E was authorized to place against these lands two mortgages. The revised plan did not vary the total of the first and second mortgages, but simply the allocation as between the mortgagees of the principal sum to be so secured, namely $1,264,953. The sale price to the ultimate home buyer under the contract between OHC and E, including both land and buildings, totalled $1,296,240. The difference of $31,287 between the authorized sale price and the mortgage debt represents the total cash contribution to the plan of the ultimate purchasers of these houses. Presumably, E’s profit in the transaction was to have been the total of this sum of $31,287 plus the excess, if any, of the proceeds of the first mortgage over the construction costs incurred by E in building these houses. Such was the plan. The result, of course, was financial disaster for E because of the mechanics adopted under inadequate documentation by OHC and OMC which resulted in E being required to complete a large part of the house construction before receiving reimbursement for its costs. E’s bank credit

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and working capital apparently were insufficient to the task.

On December 2, sale proceedings were commenced by OMC purporting to act under the first mortgage. By agreement of all parties, the $425,000 received on the sale of these lands and premises is held by OMC pending the outcome of these proceedings.

There are many issues, principal and subsidiary, to be settled: first, is OHC an “owner” as defined in the Act? The word has a special meaning in the statute. It is not confined to the common law concept of ownership. Section 1(1)(d) provides:

1.-(1)…

(d) “owner” includes any person and corporation, including a municipal corporation and a railway company, having any estate or interest in the land upon which or in respect of which work is done or materials are placed or furnished, at whose request, and

(i) upon whose credit, or

(ii) on whose behalf, or

(iii) with whose privity or consent, or

(iv) for whose direct benefit,

work is done or materials are placed or furnished and all persons claiming under him or it whose rights are acquired after the work in respect of which the lien is claimed is commenced or the materials placed or furnished have been commenced to be placed or furnished;

This definition and its significance in the statutory pattern is reviewed at length in the recent decision of this Court in Phoenix Assurance Co. v. Bird Construction Co., issued on September 17, 1984 and now reported at [1984] 2 S.C.R. 199. The discussion of the concept of “owner” in the Act need not be repeated here. The three courts below found that OHC, the Crown corporation, falls within the definition of “owner” under the Act. A short reference to the arrangements between E and OHC is all that is required to find ample justification for this finding. The basic agreement between

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OHC and E provided:

(a) for the maximum selling price for which E may sell these houses;

(b) for the construction of these houses according to models, plans and specifications as approved by OHC;

(c) that the distribution of models throughout the twenty-five lots shall be as approved by the architect of OHC;

(d) no change in the plans may be effected without specific waiver by OHC;

(e) OHC reserves the right to include in any conveyance to E any of the terms and conditions of the basic agreement with E;

(f) E may sell such houses when completed only to purchasers approved by OHC, and OHC has the “unqualified right” to determine the method of selection of the purchasers and the advertising of the houses for sale;

(g) OHC may at any time elect to purchase any or all of the completed houses for the contract specified sale price;

(h) all sales contracts between E and the purchasers shall be in the form of agreement prescribed by OHC;

(i) in the event of default of any clause in the basic agreement, OHC has the right to enter upon the lands in question for the purpose of remedying the default and charging any expense associated therewith to E;

(j) OHC has the right to enter upon these lands at any time for a period of three years in order to inspect and repair grading, drainage, etc.

It is clear that OHC, as a Crown corporation, can qualify as an owner under the Act (s. 1(1)(d)). OHC has an interest or estate in these lands. By its arrangements and relationship with E, OHC has a very extensive interest, in the broader sense

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of the word, but over and above all these considerations is the similarity of the relationship between OHC and E to those relationships examined by this Court in Northern Electric Co. v. Manufacturers Life Insurance Co., [1977] 2 S.C.R. 762, Hamilton (City of) v. Cipriani, [1977] 1 S.C.R. 169, and Phoenix, supra. In each case the entrepreneur of the project, though with varying final positions or interests, was found to be an owner under the Act. OHC, on these authorities, clearly falls within the statutory definition of an owner, and in this, I am in respectful agreement with all the others below. The conclusion expressed by Rutherford J. on this point summarizes the position taken by all the courts below:

In light of the facts in the instant case, however, I do not think Ontario Housing can be heard to deny that its involvement in the Borden Farm project was sufficient to constitute it an “owner”. Both before and after September 26, 1977, Ontario Housing had intimate knowledge of the project and took an active role in its progress. It directed Edstan as to what work was to be done and as to the specifications it was to meet. Moreover, the work was done on behalf of Ontario Housing in the sense that it was Ontario Housing’s mandate to provide residential accommodation of the variety Edstan contracted to build. It can also be said that the work was performed and the materials were furnished with the consent of Ontario Housing and for its direct benefit. For these reasons, I find myself in complete agreement with Judge Doyle’s finding that Ontario Housing was an “owner” within the meaning of s. 1(1)(d) of the Act.

I turn now to the issue as to whether or not this building enterprise is a “public work” as defined in s. 1(1)(da):

1.—(1)…

(da) “public work” means the property of the Crown and includes land in which the Crown has an estate or interest, and also includes all works and properties acquired, constructed, extended, enlarged, repaired, equipped or improved at the expense of the Crown, or for the acquisition, construction, repairing, equipping, extending, enlarging or improving of which any public money is appropriat-

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ed by the Legislature, but not any work for which money is appropriated as a subsidy only.

The statute was amended in 1975 (1975 (Ont.), c. 43) by the introduction of the concept of rights analogous to lien rights against Crown property. By these amendments, the Act was extended to include Crown agencies, and the definition of “owner” was extended to include the Crown. Section 5 was amended by establishing in subs. (2) a procedure comparable to the lien process where the supplier of materials or services has done so with reference to municipal property or a public work. Complementary provisions were added later in the Act detailing the process of giving notice to the Crown agency or department of government in place of the registration of a lien required with respect to all other property.

OHC is admittedly an agent of the Crown, and admittedly OHC “has an estate or interest” in these lands. All the courts below found this project to come within the definition of a “public work”, and I respectfully agree. As Houlden J.A., speaking for the Court of Appeal, did, I refrain from expressing an opinion as to whether, by the simple process of a Crown agency holding a mortgage against land, any work undertaken on that land, without more, becomes a “public work” within the statute. It is unnecessary here to make that decision.

The learned trial judge decided that although the project was a public work, the ten claimants, by registering their lien claims, held valid liens against OHC, notwithstanding the failure to comply with then s. 21a, that is, the failure to give notice in writing to OHC. With respect, I must join the Court of Appeal in reversing this conclusion. The ten claimants who did not give the notice have no claim under the Act against the interest of OHC because their failure to give such notice is not cured by the registration of the lien claim, nor can reliance be placed in such circumstances upon

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s. 18. The concept of a mechanics’ lien was, of course, unknown to the common law. It is entirely a creature of statute. The statute here was extensively amended in 1975, supra, to introduce the concept of the claim and enforcement of a lien against Crown property and property in which the Crown has an interest. The sections of the statute then introduced are explicit in their requirement of a notice to the Crown agency or the ministry of government concerned. Failure to give that notice in writing is a breach of the statute. Section 18(1) is a saving clause:

18.—(1) Substantial compliance with sections 16, 17, 21a and 29 is sufficient and no claim for lien is invalidated by reason of failure to comply with any of the requirements of such sections unless, in the opinion of the judge or officer trying the action, the owner, contractor or subcontractor, mortgagee or other person is prejudiced thereby, and then only to the extent to which he is thereby prejudiced.

(2) Nothing in this section dispenses with the requirement of registration of the claim for lien.

The notice provisions require that the person giving the notice verify certain specified items of the notice by affidavit. The liens of neither of the lien claimants, Henry nor Gordon, were accompanied by the appropriate affidavit. The absence of the affidavit can be cured by s. 18, but the failure to give the notice at all cannot, in my view, be so cured. I quote from Macklem and Bristow, Mechanics’ Liens in Canada (4th ed. 1978), pp. 8-9:

…the Courts take the position that the Act, being of a remedial nature, should receive a liberal interpretation. This statement is supported by the provisions of the various provincial Interpretation Acts. However, a claimant who fails to follow the elementary and essential requirements for the creation and preservation of his lien will lose it because, as has also been pointed out, the Act, being in derogation of the common law, must be strictly construed in this respect. Once the lien has been created and preserved by registration, however, the enforcement of it is governed by the provisions of the

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Act designed to bring about such realization in as summary and expeditious a manner as possible.

I am in respectful agreement with Houlden J.A. in the Court of Appeal in the finding that the ten lien claimants may not rely upon the registered liens for a claim against the interest of OHC, but the two lien claimants who delivered notices to OHC in addition to the registration of their liens may, notwithstanding the absence of an affidavit, enforce their liens against the interest of OHC. It may be that the requirement of essential compliance with s. 21a in the giving of notice in the case of a public work imposes a hardship upon the supplier of goods and services to a construction project. The requirement of the Act, however, is clear, and the remedy is legislative, not judicial.

It therefore follows that the two lien claimants who delivered the notice pursuant to s. 21a have valid and enforceable liens against the interest of OHC. The next issue, then, relates to the amount of recovery. Section 5(2) reads as follows:

5.—…

(2) Where the land or premises upon or in respect of which any work is done or materials are placed or furnished is,

(a) a public street or highway owned by a municipality; or

(b) a public work,

the lien given by subsection 1 does not in any event attach to such land or premises but shall instead constitute a charge on amounts directed to be retained by section 11, and the provisions of this Act shall be construed, mutatis mutandis, to have effect without requiring the registration or enforcement of a lien or a claim for lien against such land or premises.

The Divisional Court limited the amount of recovery in these two lien claimants to the amount of the holdbacks which should have been effected by OHC under s. 11, which sum amounted in all to $25,117.20. The Court of Appeal allowed the appeal in this respect and awarded the total lien claims made by these two lien claimants on the basis that s. 5(2), as enacted in 1975, does not

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limit persons claiming liens against a public work to the holdback provisions of subss. 11(7) and (9), but rather invokes the whole of s. 11, including subs. (6). With respect, I agree with the Court of Appeal, speaking through Houlden J.A., that, if the amounts in question remaining in possession, or which should have remained in possession of the owners, exceeded the amount of the liens advanced in compliance with s. 21a, the lien claimants are entitled to payment in full. On the facts here, E is indebted to these two lien claimants for the full amount of their lien claims, and whether or not these claims exceed the statutory holdback requirements of subss. 11(7) and (9) is not determinative. Accordingly, I would dismiss the appeal of OHC from the order of the Court of Appeal as it concerns the lien claimants, Ken Gordon Excavating Limited in its own right, and S. Henry & Sons Limited.

This disposes of the preliminary issues which absorbed much of the argument before this Court and which occupy much of the reasons for judgment in the courts below. What remains is the most difficult aspect of this proceeding, namely the consequences in law of the payments by OMC out of the proceeds of the first mortgage on November 1 and December 1, 1977, amounting in all to $350,930. This takes one back to the details of these complicated transactions in order to properly characterize the payments as a matter of law.

Both the Divisional Court and the Court of Appeal concluded that these payments were not “advances” under the mortgage. Houlden J.A., speaking for the Court of Appeal, put it this way:

…the payments were not payments or advances on account of the O.M.C. mortgage but were the purchase price paid by O.M.C. to O.H.C. for O.H.C.’s interest in the O.M.C. mortgage pursuant to an agreement entered into between the parties, the interest of O.H.C. being equal to the amount of the primary principal sum.

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That being so, s. 14 of The Mechanics’ Lien Act did not operate to give the ten lienholders any priority over OHC so as to make these funds available to satisfy the ten liens which were registered but were not the subject of a notice under s. 21a. This is the principal defence of OHC and OMC to the claims of the ten lien claimants. The Court of Appeal observed, and with respect I think rightly so, that the liens of the ten claimants are:

…. of course, valid with respect to the interest of Edstan Construction Limited in the lands and premises, but because of their failure to comply with s. 21a of the Act, they are invalid with respect to the interests of O.H.C.

Counsel for OMC, speaking with commendable candour, agreed that, if the $350,930 payments in November-December are “advances” in the nature of progress payments to a contractor-mortgagor, the payments being made in the face of validly registered liens would remain available to retire the claims of the lien claimants who, as against the world, have priority under The Mechanics’ Lien Act once they have complied with the Act by registration, as is the case here. To this extent then, the proceeds of the sale of the lands and premises under the power of sale in the first mortgage remain available to retire the ten lien claims.

The question therefore is, what is the character in law of these $350,930 payments by OMC to OHC? That, in turn, raises the question, what was the nature of the triangular transaction involving OHC, E and OMC? There is no question that at least initially, OHC agreed to sell and E agreed to buy the twenty-five lots for a price equal to OHC’s cost plus profit in the land (the primary principal plus the remainder principal, being $670,500). This price was to be payable by the purchaser E giving back to the vendor OHC, on closing of the purchase, a mortgage which the parties agreed would be a second mortgage, securing the amount of $670,500. The agreement with OHC also per-

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mitted E to obtain a first mortgage greater than the minimum specified by the contract or could require its purchasers to put up sufficient cash on the purchase of each house to make up the difference.

There seems to be no doubt that under the initial contract of agreement of May 5, 1977, the relationship between OHC and E (apart from the operation of The Mechanics’ Lien Act) was that of vendor and purchaser, and E was left to find his profit or to maintain his solvency from the first mortgage and the variable difference between that mortgage and the authorized price ceiling for the house only as fixed by the contract between E and OHC. OMC was not a party to that contract.

As we have seen, the parties, E and OHC, amended some of the terms of the initial agreement. The agreement still referred to the transaction as a purchase and sale. The first mortgage clause was revised by allowing E “the privilege” of increasing the first mortgage “by the primary principal sum”, that is the “land cost” component in the OHC second mortgage amounting to $350,930 spread over the twenty-five lots, which E could have done under the original agreement. The agreement then provided for a compensating reduction of the principal sum secured by the OHC second mortgage. In the event the first mortgage was so increased, an amount equal to that increase was to be paid to OHC out of the advances to E on the first mortgage. Presumably, this provision in the amending agreement was designed to operate as a direction from the mortgagor E to the mortgagee OMC, although OMC is not a party to this agreement. E was required in this modified arrangement to pay interest to OHC on the “primary principal sum” (the land cost) until it is paid out to OHC. This amending clause, accidentally or deliberately, overlooks the reality of the initial transaction and burdens E with the payment of interest on the OHC land cost under the second mortgage rather than passing the entire

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burden of repayment of the second mortgage to the house purchaser.

None of these clauses alters the fundamental nature of the contract as one of purchase and sale, with related provisions for the financing of the land purchase by E and thereafter for the construction of the houses by E. The amending agreement appears to be defective in that no express provision is made for the date of payment of the remainder principal, or land profit, which is the only principal thereafter secured by the OHC second mortgage. We are not here concerned, however, either with that possible difficulty, or indeed with the disastrous effect of the acceleration of the payment of the land cost in cash by E to OHC, or the effect the revised transaction would have upon the house purchaser.

The only other documents which bear upon the nature of the transaction between E and OHC are the mortgage commitment issued by OMC on August 9 and the amendment of that commitment on August 22. These two documents passed between E and OMC; OHC was not a party to these arrangements, and thus these documents cannot, by themselves, operate to change the legal nature of the transaction between E and OHC. The initial mortgage commitment, issued three months after the agreement between OHC and E, was in the amount of $931,001.84. This is said to include the $350,930 primary principal payable by E to OHC for the purchase of the twenty-five lots. The evidence is vague on this point, but 95 per cent of the authorized house sale price is $594,453 which, when added to the aforementioned $350,930, approximates the mortgage commitment from OMC. Under this commitment, mortgage interest was payable by deduction from mortgage advances until April 1, 1978 when the amortization program payable in blended monthly instalments was to commence. By letter dated August 22, 1977, the commitment letter was amended by adding three paragraphs as follows:

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Upon transfer of title from Ontario Housing Corporation to the mortgagor, a sum equal to the “primary principal sum” set out in the agreement of purchase and sale with Ontario Housing Corporation will be deemed to be advanced to Ontario Housing Corporation.

Such sum will constitute an ownership by Ontario Housing Corporation in the mortgage security as if Ontario Housing Corporation had taken back a purchase money mortgage for the sum and such sum will be subject to the provisions for interest in the Ontario Housing Corporation agreement.

Upon the commencement of that interest or upon authorization by Central Mortgage and Housing Corporation of a land advance, whichever is earlier, Ontario Mortgage Corporation will purchase the Ontario Housing Corporation portion of the mortgage and fees and interest thereon will be charged by Ontario Mortgage Corporation as if Ontario Mortgage Corporation had made a mortgage advance on that date.

Several comments must be made about this amendment to the commitment. OHC again was not a party to it. The first paragraph purports to deem an advance to OHC, presumably from the first mortgage payments. This appears to coincide with paragraph (5)(a) in the amended agreement between OHC and E, supra, which provides that an amount equal to the primary principal shall be “deducted from the advances to the Builder on the first mortgage and paid to O.H.C.” However, the mortgage commitment purports to go further and deem an advance without an actual “advance to the Builder”. Since OHC is not a party, this is a rather remarkable and opaque provision. The second paragraph is entirely unsupported in the record by any assignment of a mortgage interest which, of course, OHC, on the date of the amendment of August 22, did not hold in the property, and, indeed, OHC never did have a mortgage interest with respect to the primary principal sum since the OHC second mortgage as executed did not include that sum. This is a very flimsy, if not utterly incomprehensible, base upon which to found an argument that somehow the mortgage advances were not made, at least nominally, to the mortgagor E out of the moneys to be secured by the first mortgage of OMC. The agreement between OHC and E is still one between vendor and

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purchaser, and the latter, E, remains contract bound to pay for the land, in part by a mortgage back and in part by cash now coming from the OMC first mortgage. The third paragraph makes reference to “the commencement of that interest” which is ambiguous in that it may refer to the immediately preceding reference to interest payable to OHC, or it may refer to the interest said to be acquired by OMC from OHC in the immediately preceding paragraph. The next clause in that paragraph is even more confusing in that it keys the subsequent event of purchasing to an “authorization by Central Mortgage and Housing Corporation of a land advance”. The term “land advance” is nowhere else mentioned, let alone defined, and there is no reference in the initial mortgage commitment to any authorization by CMHC other than “progress draws advanced from time to time”. If the three paragraphs, added together and read in conjunction with the aforementioned paragraph (5)(a) in the amending agreement, are intended to establish the novel concept of an assignment of an outstanding mortgage interest (which never came into existence) in OHC, these provisions fail completely. The third paragraph continues by providing that OMC will purchase the OHC portion of the mortgage and that OMC will charge interest as if OMC had made a mortgage advance on “that date”. Presumably, “that date” relates back to the aforementioned opening ambiguity in this third paragraph, that is to say, either the date when OMC acquires an interest in whatever is being assigned to it from OHC, or the date of a CMHC authorization of a “land advance”.

Through this clutter of documentation, one must always bear in mind that, by contract, E is obligated to purchase the twenty-five lots from OHC and to pay therefor the combined land costs of OHC, that is, capital cost and capital profit. In no document executed by OHC and E is this obligation annulled. OHC has the right under the agreement

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to receive a mortgage from E in part payment of the price, and the balance in cash from E who, in turn, was entitled to raise that cash by way of an enlarged first mortgage from OMC. There is no other machinery provided in the complex docume-tation flowing around the triangle of OMC, OHC and E. Sometime later, on September 15, 1977, OMC and OHC entered into an agreement which recites the OHC-E agreement and OMC’s mortgage commmitments. In paragraph 2, OMC undertakes to issue “the attached commitment letter to the Builder”, but no such attachment appears in the record. OMC then undertakes to:

…secure and protect the interest of Ontario Housing, as an agent for Ontario Housing, for the primary principal sum of such land sale prices as well as the interests of Ontario Mortgage by means of the first mortgage and the necessary protections ancillary thereto.

I cannot unravel the language of the paragraph so as to construct or reconstruct a transaction binding on E, who is not a party to this contract, which will somehow deprive E of its right to receive the cash from the mortgagee on the first mortgage to retire its obligation to OHC as the vendor under the basic agreement. There is nothing else in the record which could effectively operate as a direction by E to OMC to disburse the advances under the first mortgage to OHC. Paragraph 3 of this agreement raises another conundrum, fortunately apparently irrelevant to the problems arising in this appeal. It states in part that “Ontario Housing will not charge interest to the builder on the land sale price until the date specified in…” the basic agreement as amended. OHC, of course, had no mortgage on September 15, the date of this agreement, nor, obviously, on May 5 or August 22 when the basic agreement was executed and amended respectively. Perhaps the reference should be to OMC and not OHC.

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The next paragraph of the agreement states as follows:

Ontario Mortgage shall purchase the interest of Ontario Housing in the mortgage for such portions of the Ontario Housing share as become subject to interest under the above Clause 3, on the dates that such portions become subject to interest.

Again, this, at most, is an inarticulate attempt to perhaps establish the mechanics of an assignment in futuro of a mortgage interest of OHC, if, as and when it arises. Unfortunately for the authors of this paragraph, the contract amendment of September 22 three weeks prior to this agreement has otherwise dealt with the mortgage entitlement, actual or in futuro, of OHC with reference to the primary principal. However the basic agreement is interpreted, either with reference to the original version of the first mortgage or the reduced second mortgage in the second version, the position of E, in essence, remains undisturbed.

Section 14(1) of the Act provides in part:

14.—…

(1) The lien has priority over all…payments or advances made on account of any… mortgage after notice in writing of the lien has been given to the person making such payments…

If these payments are advances, then, as conceded by all parties in this Court, the registered liens have priority. There has been very little established in our courts as to the meaning of “advances” under s. 14(1). In Smith & Sons Ltd. v. May (1923), 54 O.L.R. 21, the Court of Appeal of Ontario concluded that moneys paid out by the mortgagee nominally to the mortgagor, but applied to another debt owing by the mortgagor to the mortgagee, were “advances” under the mortgage for the purposes of s. 14(1), which was, at that date, substantially in the same form as at the time the liens in this appeal were registered. Because the liens in question were not registered in the Smith & Sons case, supra, the lien claimants failed. However, Middleton J., in finding that moneys paid out to the mortgagor to retire an

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earlier mortgage were “advances” under the mortgage within the meaning of the statute, had this to say, at p. 23:

The fact that the money was paid to the mortgagee in reduction of his mortgage on other property is quite immaterial.

He also observed that the acknowledged honesty of the parties (as was surely the case here) is also irrelevant.

Counsel for OMC, in submissions in this Court, made reference on this issue to our judgment in Dorbern Investments Ltd. v. Provincial Bank of Canada, [1981] 1 S.C.R. 459, where this Court was dealing with priorities when lien registration had not been effected, nor had written notice been given at the time the advances under the mortgage were made. Chief Justice Laskin, in finding that the lien claim failed because of failure of notice or registration at the time of the advances, stated, at p. 463:

The concluding words of s. 14(1) underline this in stating that “in the absence of such notice in writing or the registration of claim for notice in writing or the registration of a claim for lien, all such payments or advances have priority over any such lien”. Section 14(1) is thus of no assistance in this case either to the lien claimant or to the subsequent mortgagee; the lien claimant cannot turn this provision for a limited and conditioned priority as against a subsequent mortgagee into a general priority ungoverned by any condition such as written notice or registration.

Later, at p. 468, the Chief Justice concluded:

…I read s. 14(1) as giving the lien claimant priority over subsequent advances, notwithstanding registration of the mortgage under which they are made, provided the lien claimant either gives the prescribed written notice or registers the lien.

The case is otherwise not helpful in the task confronting the Court here, which is the proper characterization in law of the payments made by the mortgagee OMC to OHC.

In this appeal, once the transaction is properly characterized as an advance under a building mortgage pursuant to the contractual direction of

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the mortgagor, then all matters of priority fall into place. Stated another way, once OMC and OHC fail to demonstrate properly a legal characterization of the transaction as the sale of an interest in a mortgage by OHC to OMC, the priorities become clear. Whatever may have been the intention of the management of OHC and OMC and in the minds of the draftsmen of the documentation, the documentation falls hopelessly short of that which would be required to establish the transaction as the sale of an unregistered inchoate mortgage interest which, by design of the principal actors, was never to come into existence. The very proposition is novel, and its documentation prior to the registration, or indeed the execution, of any mortgages raises monumental difficulties for the draftsman.

The result of this unusual and ill-defined arrangement and the somewhat chaotic record as assembled by the parties at trial is, in my view, reducible to the simple result that the OMC advances of $350,930 on November 1 and December 1, 1977, were ordinary mortgage advances charged to E, the mortgagor, and paid out to OHC without precise direction from the mortgagor E. If they were mortgage advances authorized by CMHC, they were not “land advances”, whatever that term may have meant to the parties. OMC should, in any event, have made the ordinary construction advances to E over and above the $350,930, as authorized by CMHC. All of this, of course, could have been prevented by OMC simply obtaining a specific direction to make the $350,930 advance to OHC which was deemed to have been advanced by the amended mortgage commitment, and thereafter responding to CMHC’s progress payment authorizations by paying out to E the amounts so authorized.

By reason of the disposition made above of the several lien claims, it is not necessary to examine the submissions made with reference to the trust provision in s. 2(3) of the Act. Nor is it necessary to deal specifically, as a matter of law, with the characterization of and entitlement to the proceeds

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received by OMC from the exercise of the power of sale under its mortgage.

In the result:

(a) The lien claims by Ken Gordon Excavating Limited, in its own right, and by S. Henry & Sons Limited are valid and must be paid in full by OHC. Accordingly, the appeal of OHC fails and the order of the Court of Appeal is confirmed, with costs in this Court to these two lien claimants.

(b) The remaining ten liens are valid as against E and have priority over OHC with reference to the advances amounting to $350,930 paid out by OMC. The trial judge found the total of lien claims to be $136,319.10, and there is no appeal with respect to the amount. Lien claims totalling $128,083.49 were filed before November 1, 1977; accordingly, they may be satisfied out of the $281,060 advance made by OMC to OHC on November 1, 1977. The remaining claims, which total $8,235.61, were all registered by November 18, and can be satisfied out of the December 1, 1977 advance of $69,870.

(c) The proceeds from the exercise of the power of sale, as received and as held by OMC pending the outcome of these proceedings, shall be applied to the extent necessary to pay the lien claims of the ten lien claimants.

(d) All payments herein to be made to the twelve lien claimants shall bear interest compounded in accordance with paragraph 1(h) of the order of the Divisional Court.

(e) The appellant, Ken Gordon Excavating Limited, in its own right, and S. Henry & Sons Limited shall be entitled to their costs against OHC here and in all courts below.

(f) The appellant Ken Gordon Excavating Limited, in its representative capacity, shall have

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its costs against OMC here and in the courts below,

(g) The appeal of OHC shall be dismissed without costs in this Court.

The appeal of Ken Gordon Excavating Limited is allowed and the appeal of Ontario Housing Corporation dismissed, both with costs accordingly.

Solicitors for Ken Gordon Excavating Limited (in its representative capacity): Soloway, Wright, Houston, Greenberg, O’Grady, Morin, Ottawa.

Solicitor for Ontario Housing Corporation: H. Allan Leal, Toronto.

Solicitors for Ontario Mortgage Corporation: Goldberg, Shinder, Gardner, Kronick & Tavel, Ottawa.

Solicitors for Ken Gordon Excavating Limited (in its individual capacity): Wilson, Dubuc, Ryan & Whillans, Ottawa.