Ledore v Dixin: Procedural Fairness and the Limits of Rough Justice

In Ledore Investments v Dixin Construction[1],on an application for judicial review, the Ontario Divisional Court was asked to consider whether an adjudication under Ontario’s Construction Act (the “Act”) should be set aside on the basis that the parties did not have an opportunity to make submissions on a determinative issue.

After reviewing the facts and the relevant law, the Court made a rare decision to remit the matter back to the adjudicator for further consideration on the basis that the conduct of the adjudication amounted to a breach of procedural fairness. Below, we consider the implications of this case in respect of the decision itself as well as broader implications on the adjudication regime as a whole – particularly given the intersection of the underlying principle of rough justice and the conflicting boundaries of procedural fairness.

Background

This case involved both the adjudication and prompt payment provisions of the Act. Here, Ledore Investments Limited, carrying on business as Ross Steel Fabricators & Contractors (“Ross Steel”), was a subcontractor on a project at Lambton College. In respect of that project, and relevant to the dispute between the parties, Ross Steel submitted three invoices to the contractor, Dixin Construction (“Dixin”), which went unpaid notwithstanding the prompt payment requirements of the Act. The invoices totalled $349,263.57, inclusive of HST and holdback.

Dixin had received payment from the owner in respect of the work performed by Ross Steel, but failed in turn to pay Ross Steel or, alternatively, to provide Ross Steel with a Form 1.3 “Contractor Notice of Non-Payment if Dispute” within the prescribed timeframe. Such a notice would have exempted Dixin from the requirement to pass down payments from the owner under the Act’s prompt payment provisions. Having not provided such notice, and in normal circumstances, the prompt payment requirements of the Act would ostensibly have been triggered so as to require Dixin to make payment down the chain to Ross Steel.

However, not long after the third invoice was issued by Ross Steel (with the first two invoices having gone unpaid), Dixin noted Ross Steel in default and subsequently terminated its subcontract. Dixin’s rationale for this default and termination appears to be that Ross Steel “had failed to agree to a schedule for the performance of the subcontract, had failed to perform its subcontract in a timely manner, and that its work also required repair.” In respect of this issue, Dixin claimed set-off against Ross Steel.

Ross Steel then referred the dispute to interim adjudication under section 13.7(1) of the Act. The adjudicator assigned by Ontario Dispute Adjudication for Construction Contracts (“ODACC”) permitted only written submissions from the parties. Ross had not previously referred the prior invoice non-payment issues to adjudication, notwithstanding its entitlement to do so.

In this post termination adjudication, the adjudicator concluded that Dixin was not required to pay the invoices. However, and importantly, the adjudicator made this decision for reasons not raised by either party.

In particular, the adjudicator found that the invoice that Dixin had delivered upstream to Lambton College (the Owner) was not a ‘proper invoice”’ as defined in the Act. (That is to say, the adjudicator questioned an invoice that was not in dispute.) As a result, the Adjudicator determined that the prompt payment regime (including requirements for a notice of non-payment to have been issued) was not yet engaged.

The adjudicator expressly acknowledged that neither party had raised this issue, but did not solicit further submissions from either party on this point. The adjudicator instead suggested that Ross Steel “relaunch” the adjudication on a fresh basis, i.e., that Dixin failed to deliver a proper invoice to the owner and that this resulted in a breach of the subcontract and/or the Act.

The adjudicator also concluded that, if the prompt payment regime had been engaged, he would have found that Dixin was required to pay the invoices and was not entitled to set-off against them. This was primarily given that Dixin had failed to give appropriate notice of non-payment in respect of any of the three invoices issued by Ross Steel.

Unsatisfied with the possibility of returning to the beginning of the adjudication process, Ross Steel elected to seek leave from the Divisional Court under section 13.18(1) of the Act for judicial review of the decision. Under section 13.18(5), an adjudicator’s determination can only be set aside on the following grounds:

1. The applicant participated in the adjudication while under a legal incapacity.
2. The contract or subcontract is invalid or has ceased to exist.
3. The determination was of a matter that may not be the subject of adjudication under this Part, or of a matter entirely unrelated to the subject of the adjudication.
4. The adjudication was conducted by someone other than an adjudicator.
5. The procedures followed in the adjudication did not accord with the procedures to which the adjudication was subject under this Part [i.e. Part II.1 of the Act], and the failure to accord prejudiced the applicant’s right to a fair adjudication.
6. There is a reasonable apprehension of bias on the part of the adjudicator.
7. The determination was made as a result of fraud.

Importantly, leave to judicial review is intended to be given rarely and only in respect of the above noted grounds. The general intent of the legislation is to allow rough justice and to provide deference to adjudicators except in the strictest of enumerated circumstances. Notwithstanding the rarity of this relief, and that it has not actually been provided for in any case to date, Ross Steel was granted leave to seek review based on grounds nos 3 and 5.

The Court’s Decision

The Court only found it necessary to consider ground no 5: that the applicant’s right to a fair adjudication was prejudiced by procedures that did not accord with the prescribed procedures.

While Part II.1 of the Act itself did not “expressly incorporate principles of procedural fairness”, section 13.6 (in Part II.1) did state that an adjudication shall be conducted in accordance with procedures set out in regulations.[2] O Reg 306/18 in turn provides a code of conduct for adjudicators that includes principles of procedural fairness. Therefore, the Court concluded that procedural fairness applied.

The Court also indicated that any “serious breaches” of procedural fairness would also necessarily fall with the Divisional Court’s jurisdiction.

The Court acknowledged that procedural fairness for an adjudication under the Act did not require “a full range of procedural protections”,[3] and that it was necessary to consider the statutory context and the prompt and abbreviated nature of the adjudicative process. However, it found that “the right to be heard on the determinative issue is a central component of even more limited procedural protections”,  adding:

It is a legal truism in our system of justice that it is fundamentally unfair, and quite possibly unreliable, for a judicial officer or adjudicator to reach a conclusion in his or her reasons for judgment in a proceeding based on an issue that has not been pleaded or relied upon by a party to the proceeding.[4]

The Court observed that it was “fundamentally unfair” to determine the dispute on an issue that neither party spoke to, because “the losing party has had no opportunity to know the case it has to meet, or to address the issue that has been determined to be decisive”.[5] The Court also noted that Dixin had not even submitted to the adjudicator any invoices that it had submitted to Lambton College.

In the Court’s view, the problem with the adjudication was not so much that the parties did not raise the issue, but more so that the adjudicator’s determination was not tested by the adversarial process. The Court noted that both parties could have “offered valuable insights to the adjudicator, had they been given the opportunity”.[6]

The Court concluded that the statutory scheme “does not preclude an adjudicator from requesting further written submissions on the determinative issue”,[7] and suggested that the adjudicator could have invited submissions on the following:

1.    whether, even though Dixin had received payment from the College, its failure to issue a “proper invoice” to the College should allow it to withhold payment to Ross Steel;

2.    what, if anything, in the Act required the use by a contractor of a “proper invoice” to an Owner to engage the rest of the prompt payment scheme; and

3.    what effect a requirement to issue “proper invoices” to engage the prompt payment provisions would have on the policies and legislative choices that lie behind Part I.1 of the Act.[8]

The Court also rejected the idea advanced by Dixin that the adjudicator’s power to “tak[e] the initiative in ascertaining the relevant facts and law” overrides “an experienced party’s fundamental right to be heard on the determinative issue.”[9]

In terms of a remedy, the Court declined to substitute its analysis for that of the adjudicator, instead remitting the matter to the adjudicator for further consideration.

Commentary

At first blush, the result in Ledore appears intuitively correct insofar as the right to be heard, to make one’s case, and to respond to the case against them are fundamental principles of the adversarial system of dispute resolution. On balance, the Court’s conclusion is therefore a reasonable one, and is consistent with the proposition that judicial review is to be rarely sought (and relief rarely granted) with respect to adjudication.

That being said, the Court’s analysis nevertheless highlights certain issues regarding how the structure and intent of the adjudication regime are meant to interact with principles of fairness rooted in the more traditional format of adversarial dispute resolution.

First, it is notable that the issue of whether an invoice is a “proper invoice” is arguably a straightforward inquiry that requires limited scrutiny and might not admit competing interpretations. In particular, the Act stipulates that a “proper invoice” must include the following (in addition any other requirements stipulated by the parties’ contract):

1. The contractor’s name and address.
2. The date of the proper invoice and the period during which the services or materials were supplied.
3. Information identifying the authority, whether in the contract or otherwise, under which the services or materials were supplied.
4. A description, including quantity where appropriate, of the services or materials that were supplied.
5. The amount payable for the services or materials that were supplied, and the payment terms.
6. The name, title, telephone number and mailing address of the person to whom payment is to be sent.
7. Any other information that may be prescribed in the Act.

It seems at least arguable that these types of information are not readily susceptible to interpretation or debate – either an invoice contains this information, or it does not.

On the other hand, as the Court observed, the nature of the submissions that the adjudicator could have sought from the parties was not limited to simple review of invoices, but rather went to the interpretation of the Act’s adjudication provisions themselves, as well as their underlying policy and legislative choices. These issues would be more susceptible to robust debate, but they in turn raise a further issue with respect to the accessibility of adjudication: whereas sophisticated parties with counsel would be capable of delivering submissions on this point, it is highly unlikely that those parties at the bottom of the construction pyramid – in other words, that most vulnerable class of persons for whom adjudication was intended to provide the greatest benefit – would retain counsel, or be able to meaningfully argue over the provisions of the Act or its policy objectives.

Put differently, an interesting counterfactual to consider is if the parties in this case had been third- and fourth-tier subtrades operating as sole proprietorships, and engaging in adjudication without counsel. In that scenario, it is debatable whether seeking further submissions from the parties on the proper interpretation or policy objectives of the Act would have provided a meaningful benefit to either of the parties or the adjudicator. To the contrary, it stands to reason that the parties might very well have limited themselves to whether the contents of the invoices included all of the relevant information.

Second, it is also noteworthy that the Court concluded that Dixin’s argument that the adjudicator’s ability to undertake certain inquisitorial activities – such as ‘ascertaining the relevant facts and law’, pursuant to s. 13.12(1) of the Act – did not “override an experienced[10] party’s fundamental right to be heard on the determinative issue”. This argument seems correct insofar as the balance of s. 13.12(1) does not explicitly endow the adjudicator with plenary authority to determine the adjudication’s procedure, although on the other hand, it does authorize the adjudicator to issue “directions respecting the conduct of the adjudication” (emphasis added). It is not clear on the face of the provision whether and to what extent “conduct” is meant to be analogous to “procedure”, although it seems at least debatable (and consistent with the Court’s observation that deference is owed to the procedure chosen by the adjudicator). Ultimately, it seems that an adjudicator does have a broad procedural discretion under the Act, but not a limitless discretion.

Similarly, it is at least arguable that the adjudicator’s ability to “tak[e] the initiative in ascertaining the relevant facts and law” extended to making findings of fact and/or law, and in that sense, could credibly support the proposition that the adjudicator was entitled to conclude whether an invoice was a “proper invoice” without hearing submissions; ultimately, this point is illustrative of the tension between a quasi-inquisitorial model and the adversarial model (and culture) within which it resides. Given the latter, it is unsurprising that the Court erred on the side of a robust right to be heard – particularly in circumstances where the finding in question – that Dixin did not deliver a proper invoice to Lambton College – related to an issue not raised by the parties.

Interestingly, it is also notable that the Court’s acknowledgement of the adjudicator’s inquisitorial powers arguably undermines its reliance on the case law supporting the right to be heard, and again speaks to the tension of an inquisitorial model in an adversarial system. In particular, in support of the proposition that an adjudicator reaching a conclusion based on an issue not pleaded or relied upon by a party, the Court relied upon case law to the effect that

It is potentially unreliable because, in a system in which the adversarial process is relied upon to reach the best and most thoroughly considered determination, a decision that has not been tested in that framework cannot be trusted to have had its flaws exposed and addressed.[11] [emphasis added]

As noted, statutory adjudication under the Act is not purely adversarial, and as a result, it is arguable that the relevant case law might therefore have been of less persuasive value.

Ultimately, and although the result in Ledore v Dixin is both intuitively and legally reasonable, it nevertheless raises some concerns as to the underlying principle of adjudication as a quicker, “rough justice” approach.

If procedural fairness dictates that parties are always entitled to a right to be heard on a “determinative issue”, then it may be easy to envision sophisticated parties raising technical points of law and policy as “determinative” in an attempt to obtain a tactical advantage over less experienced, self-represented counterparties to adjudication.

This would run the risk of ‘over-legalizing’ adjudication – thus dissuading parties at the bottom of the construction pyramid, whom adjudication was intended to benefit – and of extending timelines in adjudication so that parties could properly brief any legal or policy issues raised by the adjudication. If taken too far, this could defeat the very purpose of adjudication itself and lead to more cases ending up back in courts across Ontario – where resources are already limited. We await with interest to see how the adjudication case law continues to develop in Ontario.

[1] Ledore Investments v Dixin Construction, 2024 ONSC 598.

[2] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 25.

[3] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 27.

[4] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 28.

[5] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 29.

[6] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 32.

[7] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 35.

[8] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 32.

[9] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 36.

[10] It is not clear from the Court’s analysis whether the reference to an “experienced party’s right” (emphasis added) is meant to suggest that the right to be heard in the adjudication context is more robust for experienced parties than inexperienced ones; presumably, such a fundamental right would apply equally to inexperienced parties, notwithstanding our observation above that inexperienced parties would not be as well-positioned to discuss legal and policy issues as experienced parties.

[11] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 29.

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