Arad Incorporated v Rejali et al: Court Wary of Returning Security in Lien Claims on the Sole Basis of Statutory Adjudication

The Ontario Superior Court’s recent decision in Arad Incorporated v Rejali et al, 2023 ONSC 3949^[1] (“Arad”) provides helpful guidance on motions for the return of posted security in circumstances where an interim adjudication process has concluded in accordance with Ontario’s Construction Act (the “Act”).[2]

In particular, the court confirmed that it would be wary of relying on the determinations of adjudicators (which are, of course, interim binding) when deciding to reduce or return security that has been paid into court to vacate a lien claim.[3] In fact, the court in Arad suggests that the determinations of adjudicators themselves will generally not be sufficient for a court to grant such relief.

Background

In Arad, the plaintiff (or its principal – this fact was unclear) entered into a contract to provide services and materials for the improvement of a residential property owned by two of the defendants (a third defendant was alleged to have acted as the owners’ agent or joint venture partner). The plaintiff alleged that the defendants owed it money in respect of the supply of such services and materials, and as a result, the plaintiff registered a claim for lien and certificate of action against the property. The claim for lien and certificate of action were vacated from title pursuant to s. 44 of the Act, with the defendants paying money into court as security.

The plaintiff then commenced a construction dispute interim adjudication under Part II.1 of the Act. The third defendant (the alleged agent or joint venture partner) also brought an adjudication for monies allegedly overpaid to the plaintiff’s principal. An engineer, acting as the adjudicator for both issues, concluded that no additional monies were owed to the plaintiff, and that the plaintiff’s principal was not responsible for any overpayment by the third defendant.

Neither party sought judicial review or a stay of the adjudicator’s decision. Instead, the defendants brought a motion to reduce or return the security paid into court, on the basis that the adjudicator had found no additional monies were owed to the plaintiff.

No details are provided in the decision as to the status of the lien action.

The Superior Court’s Decision

As noted by the Court, “in a nutshell, the issue [of this case was] whether the determinations of the adjudicator that no monies are owed means that the money paid into court should be returned”.

In bringing their motion, the defendants relied on s 44(5) of the Act, which states:

Reduction of amount paid into court

(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.[4]

Relying on prior case law[5], the Court found that the applicable test was whether the Court was “satisfied on the basis on the motion material that there is no reasonable prospect of the lien claimant proving that the lien claimed attracts the requirement to attract security per ss 44(1) or (2) of the Act.”[6]

While the defendants filed two affidavits, the Court observed that the “sole evidentiary basis” they provided were the determinations of the adjudicator.[7] The Court therefore considered whether or not it was appropriate to reduce or return the security based solely on the determinations of the adjudicator (who, as noted above, found against the plaintiff entirely).

In that regard, the Court found it necessary to examine the adjudicator’s methodology and conclusions. In doing so, the Court discussed the nature of interim adjudication, and adopted the following statement from Pasqualino v MGW-Homes Design Inc:

The Adjudication provisions were introduced into the Construction legislation to provide a quick, efficient, interim determination allowing funds to flow down the contractual “pyramid”. I stress that adjudication determinations are interim, allowing the parties to continue litigating the issues, including those the subject of the Adjudication determination to a final and binding determination in the courts or by arbitration.[8]

The Court also added the following observations about the interim nature of adjudication under the Act:

As interim decisions, it does not put an end to the proceeding. The proceeding continues between the parties including that which was subject of the adjudication process. The determinations of the adjudicator are not binding upon this court. The findings and conclusions of an adjudicator set out in the determination is evidence, like any other evidence, this court may take into consideration in determining whether to exercise its discretion to reduce security “where it is appropriate to do so.” But an adjudicator’s conclusions are not determinative on the decision to reduce security.[9]

[…]

For the adjudication process, I make no assertion that such a methodology is or is not permitted. … Not all evidentiary rules may be adhered to.  Not all evidence provided may be subject to scrutiny through the discovery process or subject to cross examination.[10] [emphasis added]

In other words, although the Court recognized that statutory adjudication was deliberately designed to allow for the relaxation of certain rules of procedure and evidence, it appears that this relaxation was itself cause for skepticism from the Court of the weight to be assigned to the adjudicator’s determination.

In that regard, with respect to the methodology of the adjudicator in this case, the judge noted that the adjudicator indicated that no witnesses were called and that determinations were made based on documentary evidence, oral submissions, and a site visit.[11] Further, the Court noted as follows:

The adjudicator made findings based on his opinion as an engineer and not based on the expert opinion or reports of others presented by either of the parties. His opinion was not subject to contestation by any of the parties. He made findings based on a site visit and verbal statements during the oral hearing. His findings were not all based on admissible evidence. He admitted that there was contradicting claims and statements made by the parties on the facts: the agreement and the scope of work to be performed and the worked performed. The adjudicator conceded that he did not consider the extra claims of the plaintiff for, in his opinion, he did not receive “proper evidence”. The adjudicator also decided to just rely on the documentation provided and use his own construction and engineering experience to make final determinations.[12] [emphasis added]

The Court therefore found that the “determinations of the adjudicator alone do not meet the evidentiary threshold required for the court to conclude that the lien claim does not attract need for security.”[13]

Ultimately, the Court concluded that courts should be wary of solely relying on the findings of an adjudicator in deciding whether to reduce or return security for a lien claim.[14] In this particular case, the Court also found that there was no basis to reduce the amount of the security, given that any reduction would be arbitrary without evidentiary basis.[15]

Analysis

While Arad suggests that courts may be wary of relying solely on the determinations of an adjudicator, it is also important to note that the Court did not rule out the possibility that an adjudicator’s determinations could provide sufficient evidence to reduce or return security in the right circumstances.

In the Court’s view, consideration must be given to whether the adjudicator’s determinations provide the “necessary evidentiary foundation” for reducing or returning the security[16], meaning that a court will scrutinize the adjudicator’s methodology and conclusions in deciding whether the adjudicator’s findings provide a sufficient evidentiary basis.

It follows that the closer an adjudicator adheres to evidentiary rules and elements of the adversarial system such as cross-examination of witnesses – in short, to standard civil procedure – the likelier it would be that a court would find an adjudicator’s determination to be sufficient evidence. The same would seem to hold true more broadly, in other circumstances in which a party may seek to rely on an adjudicator’s determinations as evidence in a proceeding, such as in a motion for summary judgment. Therefore, in commencing a construction dispute interim adjudication, it is important to consider that the quicker and more efficient the process is, the less likely it will subsequently be relied on by a court as evidence in a proceeding.

It therefore remains to be seen if this will incentivize parties to avoid or curtail the summary nature of adjudication in favour of a more robust procedure that they might then rely upon in the context of related lien litigation (or other construction court proceedings). As readers will appreciate, adjudication was intended from its inception to forego procedural trappings in favour of a quicker, “rough justice” approach in order to maintain the flow of funds down the construction pyramid. If parties begin to view this skepticism as it relates to related proceedings, then this aspect of adjudication might unfortunately be undermined.

The summary nature of adjudication (and its contemplation of subsequent court proceedings) is, of course, one of the reasons that adjudication is interim. By contrast, the return of posted security removes a protection for lien claimants granted by statute, and is itself more akin to a final determination (except to the extent that such an order is successfully appealed). It would seem inconsistent with the purpose of the Act – and the purpose of adjudication – for a lien claimant to lose its right to the protection of posted security on the basis of an interim determination alone, and accordingly, this decision appears to strike the appropriate balance in that regard.

[1] Arad Incorporated v Rejali et al, 2023 ONSC 3949.

[2] Construction Act, RSO 1990, C-30.

[3] While the Act distinguishes between security posted with the court and monies paid into court as security, they are equivalent for the purposes of this analysis and treated as interchangeable. See Construction Act, RSO 1990, C-30, s 44(5).

[4] Construction Act, RSO 1990, C-30, s 44(5).

[5] Pentad Construction Inc v 2022988 Ontario Inc, 2021 ONSC 824; and Chesney et al v Malamis et al, 2023 ONSC 1742.

[6] Arad Incorporated v Rejali et al, 2023 ONSC 3949 at para 22.

[7] Arad Incorporated v Rejali et al, 2023 ONSC 3949 at para 19.

[8] Pasqualino v MGW-Homes Design Inc, 2022 ONSC 5632 at para 30.

[9] Arad Incorporated v Rejali et al, 2023 ONSC 3949 at para 17.

[10] Arad Incorporated v Rejali et al, 2023 ONSC 3949 at para 28.

[11] Ibid at para 20.

[12] Ibid at para 25.

[13] Ibid at para 24.

[14] Ibid at para 28.

[15] Ibid at para 30.

[16] Ibid at para 24.

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