Introduction
A construction lien is a creature of statute, established and governed by the Construction Act, RSO c C30 (the "Act"). The Act permits individuals who supply goods or services to a property to lien that property in order to secure payment. The lien must be registered (or preserved) and the claim must be commenced (or perfected) within the timelines prescribed by the Act. The registration of construction liens is typically carried out by lawyers on behalf of their clients.
This raises the important question of when lawyers can be liable for costs, if and when they register liens that turn out to be baseless. As the recent case of 2708320 Ontario Ltd. cob Viceroy Homes v. Jia Development Inc. ("Viceroy")1 informs, subjective knowledge, recklessness or wilful blindness of a baseless lien may lead to cost liability for the registering lawyer, and a lawyer's "gatekeeping function" continues throughout the retainer.
The Test
The test for cost consequences relating to improper steps taken in construction lien proceedings is set out in section 86(1) of the Act. This relevant section reads as follows:
...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...2
Key Takeaways From Viceroy
The interpretation of section 86(1) of the Act was recently reconsidered in Viceroy. In this case, a law firm ("FR") was subject to a motion for costs under a former version of section 86(1)(b)(i) of the Act, after a construction lien registered by the firm was found to be frivolous, vexatious and an abuse of process, and was ordered to be removed from title to the property.3
In Viceroy, the impugned lien was registered by the lawyers on behalf of a client who had claimed to have provided construction services to a property. The client did provide some limited evidence of the work performed but eventually admitted that the scope of the work completed had been exaggerated.4 In dismissing the claim for costs, the court found that there was no evidence that the lawyers themselves knew that the lien claim was baseless.5
Further, based on the limited documentation provided to the lawyers and their correspondence with the client, it was not reckless for them to believe that the lien claim was not baseless as the information appeared to corroborate and explain many of the client's allegations.6
Overall, it is clear that the lawyer's "gatekeeper function" is alive and well. Lawyers can and will be held personally responsible for the costs of baseless liens if the lawyer subjectively knew or was reckless or wilfully blind to the fact that the lien was baseless when they registered and perfected it. This "gatekeeper function" extends beyond the preservation and perfection stages of a lien and the lawyers conduct will thereafter be governed by a negligence standard should the lien be found to be, or ought to have been found to be, baseless. All lawyers should be mindful of these standards when acting for clients on construction lien matters.
In rendering its decision, the court in Viceroy pronounced that a lawyer acting for a lien claimant has a "gatekeeping function".7 Given the drastic and powerful remedy that is the construction lien, and given that liens may be created without immediate judicial oversight, the lawyer who is responsible for a lien has an added duty, in addition to their duty to the client, "not to participate in allowing a remedy to be abused."8 The court pointed to the following principle from Brian T. Fletcher Construction Co. Ltd. v. 1707583 Ontario Inc., 2009 CanLII 81402 ("Fletcher")9:
"...a costs order against a solicitor... does require some evidence of bad faith, negligence or improper purpose to justify holding the solicitor liable for costs."10
Based on the foregoing principle, the court in Viceroy determined that liability for costs under section 86(1)(b)(i) of the Act requires a finding that the representative subjectively knew of the baselessness of the claim for lien when it was registered and perfected.11 Liability is also extended to lawyers who were reckless or wilfully blind as to the merit of the lien they registered.12
It is important to note that the concept of negligence does not apply to this test. The court comes to this conclusion after balancing the lawyer's duty to their client with the gatekeeper function discussed above. The court is mindful of the potential "chilling effect" that a negligence standard would have on legal representatives, i.e., if lawyers constantly worried about whether their conduct "will breach the objective standard of care and expose them to costs."13
However, it is important to note that the "gatekeeper function" extends beyond the registration and perfection of the lien; thereafter, that function transforms into a duty governed by the negligence standard. The lawyer will "... continue his or her investigation as judged by the standard of a reasonable and prudent lawyer, taking appropriate measures should the lien eventually be found by them, or ought to be found by them, to be baseless."14
Footnotes
2. Construction Act, RSO c C30 at s. 86(1).
3. Viceroy at paras 1-4.
4. Viceroy at paras 5-35.
5. Viceroy at para 57.
6. Viceroy at paras 58-65.
7. Viceroy at para 39.
8. Viceroy at para 39.
10. Fletcher at para 39.
11. Viceroy at para 47.
12. Viceroy at para 54.
13. Viceroy at paras 46-49.
14. Viceroy at para 52.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
