Canada: Ontario Court Rules That Lien Claimant Is Not Entitled To Rely Upon Mediation Agreement To Extend Deadline For Preserving A Construction Lien

Extending a Limitation Period by Agreement to Mediate

For most types of disputes in the Province of Ontario, the Limitations Act, 2002 provides that the deadline for commencing a court action is two years from the date that the underlying claim was "discovered" or ought to have been discovered (see section 5). The Limitations Act also includes an incentive for parties to seek a resolution through a mediation or other form of alternative dispute resolution prior to embarking on an expensive litigation process. Pursuant to section 11, parties can temporarily halt the running of the two-year limitation period by agreeing to retain an independent third party to resolve or assist in resolving their dispute. However, anyone seeking to rely upon this provision is required to comply with all of its requirements and, further, ought to take into consideration how such an agreement will impact situations where there are more than two parties involved in the dispute.

The Deadline for Preserving a Construction Lien

A party who is entitled to a construction lien as the result of supplying services or materials to a construction project must take several steps to assert its lien rights, all within very strict deadlines, as prescribed by the Construction Lien Act ("CLA"). The first required step is to "preserve" the lien. In most cases, this is accomplished by registering a claim for lien against title to the lands upon which the project is located. The deadline for doing so is the 45th day after the earliest of several possible dates (where the 45th day falls on a weekend or statutory holiday, the deadline is extended to the next business day). The applicable commencement date for this 45-day period is determined by section 31 of the CLA and is based upon a number of factors. However, as mandated by the CLA, the resultant deadline is strictly enforced – courts do not have any discretion on this point.

Plaintiff Contractors Argue that Their Lien Rights Were Extended

In the Divisional Court appeal decision of Logger Town Homes Limited v. Jalil Sadeghian, the plaintiffs were home renovation contractors who argued that pursuant to section 11 of the Limitations Act, an alleged agreement to mediate extended their deadline to register a construction lien. It had already been found by the lower court that without this extension, the registration of the plaintiffs' claim for lien fell outside of the applicable 45-day period and their lien had expired.

Factually, the plaintiffs relied upon an email from a lawyer advising that she was engaged to try to mediate the parties' dispute.

The legal argument advanced was based upon various provisions of the Limitations Act. It is important to quote the text of the legislation in this case, due to the nature of the argument:

Section 19(1) provides:

Section 19(3) states:

Finally, section 19(5) provides that:

The "Schedule" described in section 19 of the Limitations Act contains references to two specific provisions of the CLA, including section 31. As noted above, section 31 is the provision that establishes the 45-day deadline for preserving a lien. The other section referenced is section 36, which dictates the deadline for perfecting a construction lien by commencing an action.

In short, the plaintiffs argued that given the wording of section 19 of the Limitations Act, section 11 of that Act applies to construction liens and an agreement to mediate therefore extended the deadline for preserving their lien.

If successful, the plaintiffs' interpretation would potentially have had a dramatic impact upon the construction industry. As noted by Mr. Justice Wilton-Siegel in paragraph 11 of his reasons, the CLA contemplates that a payer on a construction contract will be in a position to release holdback funds after a reasonable period of time without risk (provided no construction liens have been registered).

In addition, it is conceivable under this interpretation that a subcontractor would extend its lien rights through an agreement to mediate with the general contractor and, if the mediation fails, register a construction lien after the release of holdback funds by the owner. The owner would then be exposed to a lien claim despite having already released its holdback. For similar reasons, this interpretation would create considerable uncertainty for mortgagees and virtually all members of the construction pyramid.

What the Court Decided

In concluding that section 11 of the Limitations Act did not apply to the deadline for preserving a construction lien, Mr. Justice Wilton-Siegel provided three primary reasons:

1. The Limitations Act, applies to "claims pursued in court proceedings". However, a construction lien is a "statutory right to security" rather than a "claim" within the meaning of the Limitations Act and is therefore not a claim to which section 19(1) applies;

2. Section 19(5) of the Limitations Act should be read the same way as section 19(1) and therefore does not apply to the deadline for preserving a statutory construction lien right; and

3. For the reasons noted above, the application of section 11 to the CLA to permit the extension of the deadline for preserving a lien would be contrary to the purpose of the CLA and would create uncertainty for project participants.

What Does All of this Mean for Construction Liens and Mediations?

One of the messages to be taken from the Logger Town Homes decision is that lien claimants must not assume that they are protected by negotiated agreements that purport to alter their statutory construction lien rights. To the contrary, it is the CLA that governs lien rights and the deadlines that are applicable to them. In this case, it was confirmed that an agreement to mediate will not extend the deadline for preserving a construction lien. This outcome is also consistent with the well-established principle that an agreement to contract out of the CLA is void.

However, parties should not be dissuaded from seeking an early, mediated resolution of their dispute. It is not uncommon for a lien claimant to preserve its rights by registering a claim for lien and commencing an action within the required time and then also proceeding with alternative dispute resolution – before investing significant time and resources on a full-blown litigation proceeding.

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.