Citation: ADI v. WCI & WCI v. ADI & IWMC Date: PESCTD 89 Docket: S1-GS Registry: Charlottetown

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1 Citation: ADI v. WCI & WCI v. ADI & IWMC Date: PESCTD 89 Docket: S1-GS Registry: Charlottetown PROVINCE OF PRINCE EDWARD ISLAND IN THE SUPREME COURT - TRIAL DIVISION BETWEEN: AND BETWEEN: ADI INTERNATIONAL INC. WCI WASTE CONVERSION INC. WCI WASTE CONVERSION INC. ADI INTERNATIONAL INC. APPLICANT RESPONDENT APPLICANT BY COUNTERCLAIM RESPONDENT BY COUNTERCLAIM ISLAND WASTE MANAGEMENT CORPORATION RESPONDENT BY COUNTERCLAIM Before: The Honourable Justice Gordon L. Campbell Kevin J. Kiley & Thomas G. O Neil, Q.C. - Solicitors for the Applicant, ADI International Inc. John K. Mitchell, Q.C. - Solicitor for the Respondent, WCI Waste Conversion Inc. John A. Carr, Q.C. - Solicitor for the Respondent, Island Waste Management Corporation Place and Date of Hearing - Charlottetown, Prince Edward Island December 18, 2002 Place and Date of Judgment - Charlottetown, Prince Edward Island December 31, 2002

2 Citation: ADI v. WCI & WCI v. ADI & IWMC 2002 PESCTD 89 Docket:S1-GS BETWEEN: AND BETWEEN: ADI INTERNATIONAL INC. WCI WASTE CONVERSION INC. WCI WASTE CONVERSION INC. ADI INTERNATIONAL INC. APPLICANT RESPONDENT APPLICANT BY COUNTERCLAIM ISLAND WASTE MANAGEMENT CORPORATION RESPONDENT BY COUNTERCLAIM Supreme Court of Prince Edward Island - Trial Division Before: Campbell J. Heard: December 18, 2002 Judgment: December 31, 2002 ( 10 pages) RESPONDENT BY COUNTERCLAIM MECHANICS LIENS - substituted security - lien bond - sufficiency of replacement security. Applicant sought the discharge of a lien upon filing of a lien bond for the face amount of the lien and costs. Application denied. CASES CONSIDERED: Clarkson Co. v. Ace Lbr. Ltd., [1963] SCR 110; Otis Elevator Co. v. Commonwealth Holiday Inns of Canada Ltd. et al., [1972] 2 O.R. 536 (Ontario Supreme Court); Tom Jones Corp. v. OSBBC Ltd. (1997), 37 C.L.R. (2d) 44 (Ontario General Division); Northern Air Construction Ltd. v. Borough of York Public Library Board et al. (1985), 50 O.R. (2d) 201 (Ontario High Court of Justice Divisional Court); Doiron et al. v. Consolidated Investments Corp. (Estate) and Schurman (M.F.) Co. Ltd. (1989), 81 NFLD & PEIR. 100 (PEICA); Central Investments and Development Corp et al. v. Canada Mortgage and Housing Corp. (1990), 81 NFLD & PEIR 180 (PEICA); Grand Pacific Holdings Ltd. v. Progressive Sheet Metal Ltd. (1993), 15 C.P.C. (3d), 398 (B.C.S.C.); B.C. Ltd. v. Tham Demolition Ltd. (1994), 18 C.L.R. (2d) 161 (B.C.S.C.). STATUTES CONSIDERED: Mechanics Lien Act, R.S.P.E.I. 1988, Cap. M-4, s.s. 2, 53, TEXTS CONSIDERED: Macklem & Bristow, Volume I, Construction Builders and Mechanics Liens in Canada, 6 th Edition, Toronto, Carswell , p. 1-2; Anger & Honsberger, Law of Real Property, 2 nd Edition, University of Western Ontario, Canada Law Book Inc. 1985; Scott & Reynold, Surety Bonds, 1996 Looseleaf Edition, pps. 12-4,12-5; Kevin J. Kiley & Thomas G. O Neil, Q.C. - Solicitors for the Applicant, ADI John K. Mitchell, Q.C. - Solicitor for the Respondent, WCI John A. Carr, Q.C. - Solicitor for IWMC

3 Campbell J.: Application: [1] This is an application to have a mechanics lien discharged upon the filing of a Mechanics Lien Bond for the amount of the lien and appropriate costs. The respondent opposes the application and argues that the form of security is not sufficient to preserve and protect its interests. The amount of any substitute security is also in dispute. Background: [2] On August 23, 2001, the applicant and respondent entered into a Memorandum of Understanding (MOU) (dated August 3/01 by the applicant) with respect to the construction of a composting facility in Brookfield, Prince Edward Island for the Island Waste Management Corporation (IWMC). ADI International Inc. (ADI) was the general contractor and WCI Waste Conversion Inc. (WCI) was a principal subcontractor. The contract between them called for total compensation to WCI of $5,324,918 plus PST and HST as applicable subject to certain adjustments and conditions. Payments were to be made on a monthly progress billing basis and ADI was to pay interest at a rate equal to the Royal Bank prime rate plus 4% on all overdue payments. [3] The total value of the contract between IWMC and ADI was $17,747, including PST, excluding GST. The project was declared to be substantially complete on October 1, IWMC has retained a lien hold back in the sum of $2,433, in compliance with the Mechanics Lien Act R.S.P.E.I., 1988 Cap. M- 4. [4] On November 28, 2002 the respondent registered a Claim of Lien in the amount of $2,225,993 against the lands of IWMC. The lien initially included an amount for interest on unpaid amounts. Counsel for the respondent conceded at the start of his submissions that no amount for interest could be included in the lien claim. Analysis: [5] A lien is an interest in land. In Clarkson Co. v. Ace Lbr. Ltd., [1963] S.C.R. 110, Ritchie J. stated that a mechanics lien creates a charge upon the owner s land which would not exist but for the Act, and grants to one class of creditors a security or preference not enjoyed by all creditors of the same debtor; accordingly, while the statute may merit a liberal interpretation with respect to the rights it confers upon those to whom it applies, it must be given a strict interpretation in determining whether any lien-claimant is a person to whom a lien is given by it.

4 [6] In Anger & Honsberger, Law of Real Property (2 nd Edition), University of Western Ontario, Canada Law Book Inc. 1985, mechanics liens are discussed under the heading Other Encumbrances against title. At page 1694, they state: 2 In its primary sense, a lien is the right of a person to retain the property of another until satisfaction of a lawful demand.... The object of the legislation is to provide a cheap and expeditious method to obtain payment for the supply of materials, or for work done, and thus prevent the owner of land getting the benefit of either the work or the materials without payment. The scheme of the Acts is to provide a fund which is a specified percentage of the main contract price or the actual value of the work or materials in the absence of a specific contract. This fund, commonly called the holdback is to be retained inviolate by the owner or the person primarily liable until completion of the undertaking and out of which those who furnished labour or materials may be paid. In addition the Acts give a lien which is a charge upon the fund and which may be registered against the property as a lien against the estate or interest of the owner. All of the Acts authorize the sale of the owner s interest to satisfy the lien or liens outstanding if the owner fails to discharge the liens by payment. [7] Section 2 of the Mechanics Lien Act, supra reads: 2. A person who (a) does, or causes to be done, any work upon or in respect of an improvement; or (b) furnishes any material to be used in an improvement for an owner, contractor or sub-contractor has, except as otherwise provided by this Act, a lien for wages or for the price of the work, or material, as the case may be, or for so much thereof as remains owing to him, upon the estate or interest of the owner in the land in respect of which the improvement is being made, as such estate or interest exists at the time the lien arises, or at any time during its existence. [8] The Act also makes provision for the sale of the encumbered lands, if necessary, to pay amounts owed under the lien. [9] The Act provides a discretionary means whereby the lien may be discharged upon the owner or some other interested party paying into court the amount of the lien and costs, or otherwise filing acceptable security to take the place of the land against which the Claim of Lien was filed.

5 3 53. (1) A judge at any time may receive security for, or payment into court of, the amount claimed in a registered claim of lien together with such costs as the judge may fix, and the judge may thereupon order that the registration of the claim of lien be discharged. (2) A judge may order discharged the registration of a claim of lien upon any other proper grounds. (3) Moneys paid into court, or any security given in an action, (a) takes the place of the land against which the claim of lien was registered; and (b) subject to subsection (4), is subject to the claim of every person who has registered a lien and, before the time limited by section 27 has expired, has commenced an action, to the same extent as if the money had been realized by a sale of the property in an action to enforce the lien. (4) The amount found by the judge to be owing to the person, the registration of whose claim of lien has been discharged under this section, shall be a first charge upon the money or security so paid in or given. (5) Whenever a judge orders a registration of a claim of lien to be discharged, the order shall forthwith be registered in the proper registry office. [10] It is under these provisions and Rule 14.05(3) of the Rules of Civil Procedure that the applicant seeks to file a bond in order to discharge the lien. The respondents are opposed to the application and have filed a counter-application under Rule seeking an order requiring the owner (IWMC) to pay the amount of the Claim of Lien into court, or alternatively, post a letter of credit in the appropriate amount as security for the discharge of the lien. The applicant argues that the provision of a Mechanics Lien Bond in the face amount of the lien (plus an amount for costs) would be security for the payment of the respondent s Claim of Lien that is as good or better than that afforded to the respondent by virtue of the Claim of Lien registered against the interest of IWMC. It argues that the filing of a Mechanics Lien Bond to discharge a lien is a common and accepted practice throughout the industry, and quotes from Surety Bonds, Scott & Reynold, 1996 Looseleaf Edition, at pages : The common law provinces all have mechanic s or construction lien legislation in force. Without exception, the lien legislation of the various provinces provides that security may be posted with the court in an appropriate amount, (that amount usually represents the full amount of the claim for lien and some additional amount for the lien claimants costs) allowing title to the property in question to be cleared and rendering the lien

6 a charge against such security rather than the land to which labour and/or materials were supplied. This, of course, allows for the continued flow of funds down the construction pyramid, as it is called, despite the fact that somewhere in the pyramid a dispute has arisen as to payment for labour and/or materials supplied. Lien Bonds are becoming more and more a common form of security for this purpose. Generally, a Lien Bond is preferable to either cash, which is a direct out-of-pocket expense, and does not earn a market rate of interest in the hands of the court, or letters of credit, the value of which will be deducted from the operating line of credit of the party posting the security. 4 [11] The applicant cites Otis Elevator Co. v. Commonwealth Holiday Inns of Canada Ltd. et al., [1972] 2 O.R. 536 (Ontario Supreme Court), wherein Colter, Co. Ct.J. stated: I consider that the interests of the claimants will be protected if the defendants pay into Court, or furnish security by way of a bond, in accordance with the Guarantee Companies Securities Act, R.S.O. 1970, c. 196, such bond to be approved by the Court, in the sum of $215,000, and upon the making of such payment or the furnishing of such security, the registration of the claims for liens and the registration of the certificates of action herein shall be vacated. as an indication of the Court s recognition that Lien Bonds provide adequate security to lien claimants [12] In Tom Jones Corp. v. OSBBC Ltd. (1997), 37 C.L.R. (2d) 44 (Ontario General Division), Kozak J. dealt with a situation where a cash payment in the face amount of the lien together with an amount for costs had been paid into court to discharge a lien. The owner sought a reduction in the amount paid in, and to convert the lower amount from cash security to security provided by way of a Lien Bond. In reducing the lien amount and converting the security from cash to a Lien Bond, Kozak J. stated:...it is acknowledged that the construction lien is purely a creature of statute and as such the wording of the statute should receive a strict interpretation. However, given the intention of the legislature and considering the modern rule of statutory interpretation which involves giving the words a contextual interpretation which best advance the object of the Act, the matter of being unable to substitute one type of security for another, under Section 44(5), would be unduly restrictive and perhaps absurd. Our Divisional Court in Northern Air Construction Ltd. v. Borough of York Public Library Board et al (1985), 50 O.R. (2d) 201 made it most clear that there is no difference between the posting of a letter of credit and a payment of money into Court or, for that matter, the filing of a lien bond in lieu of cash. On the other hand, it would make a difference to the person moving to vacate the lien in that the posting of a lien bond would free up working capital which could be put to better use, to facilitate the completion of the project. [13] There are two statements in that quotation upon which the applicant relies and

7 5 which deserve consideration with respect to the situation now before this Court. Firstly, the applicant submits that the legislative purpose of our section 53 is to free up working capital which may, if the owner chooses to do so, be used to complete the project while protecting the lien claimants rights. Secondly, the applicant would submit, in reliance on the reference to the Northern Air Construction Ltd. case, there is no difference between the payment into court of cash and the filing of a Lien Bond to discharge a mechanics lien. [14] There is no doubt that the provision allowing for the payment into court or posting of other security frees up the owner s interests and may open the door for the owner to make further payments, secure further financing or make other arrangements that would not have been available if the lien remained in place. Once a lien has been vacated, the owner is free once again to deal with its land without reference to the lien that had been filed. [15] While that may be one of the effects of section 53, and indeed, one of its purposes, it does not surpass the overriding objective of the Mechanics Lien Act which is to provide adequate security for the lien claimant for its labour and materials. Section 53 should not be employed in any manner that would leave the lien claimant in a less secure position than they would be prior to replacing the land with some form of substituted security. [16] A review of Northern Air Construction Ltd. v. Borough of York Public Library Board et al. (1985), 50 O.R. (2d) 201 (Ontario High Court of Justice Divisional Court), serves to put into context the statement by Kozak J. that there is no difference between the posting of a letter of credit and a payment of money into Court or, for that matter, the filing of a Lien Bond in lieu of cash. [17] That case dealt with a series of liens which were filed, the first two of which were vacated by the filing of Lien Bonds. Several subsequent liens were vacated upon the payment into court by the owner of the balance of the full amount due on the contract. In subsequent actions by the lien claimants to collect the amounts owing, the bonding company took the position that it did not have to pay on the bonds and that all lien claimants, including the first two, must now pursue the funds paid into court by the owner. [18] The Court was dealing with the different impact on subsisting lien claimants security depending on whether an owner made a direct payment to an individual lien claimant or made a payment into court to discharge a lien. In determining the priorities amongst lien claimants, the Court expressed the opinion that a payment into court enhanced the security of other lien claimants whereas a direct payment did not. It was in the context of confirming that the priorities would remain the same regardless of

8 whether the payment into court was made by way of cash, through filing a letter of credit, or through filing a Lien Bond, that the Court expressed that there was no difference among the methods of payment. 6 [19] The applicant cited Doiron et al. v. Consolidated Investments Corp. (Estate) and Schurman (M.F.) Co. Ltd. (1989), 81 NFLD & PEIR 100 (PEICA), dealing with a mechanics lien issue and which confirmed that a payment into Court of the amount claimed takes the place of the land against which the lien was registered. It further confirmed that by making a payment into Court, the owner is not later precluded from disputing either the validity of the lien or the amount claimed. It does not, however, deal with the different types of substitute security that may be offered. [20] The applicant also referred to Central Investments and Development Corp. et al. v. Canada Mortgage and Housing Corp. (1990), 81 NFLD & PEIR 180 (PEICA). This was not a mechanics lien case but rather one dealing with an application for security of costs on an appeal. The Court ordered the appellants to deposit security for the payment of costs with the Prothonotary in the amount of $25,000, by cash, by a bond approved by the Prothonotary, or by an irrevocable letter of credit from a financial institution approved by the Prothonotary. This case dealt generally with the provision of security. It did not, however, undertake any assessment of the relative merits of the different forms of security, especially as they are considered in substitution for in rem security granted by legislative process. [21] The respondent claims the security proposed by the applicant is insufficient and inadequate and that the security of the lienholder must take priority over the convenience of the applicant. He states that the lienholder would be in a worse position than it is at present if the applicant was allowed to substitute a bond for the in rem security it currently holds. The respondent submits that its current security, namely the land, is excellent security. Further he notes that the owner has set aside the hold back funds required by section 14 of the Act. The respondent argues for the payment into court of the hold back funds and states that it would accept a letter of credit from one of the big five Canadian banks as equivalent to cash. [22] Counsel for the respondent submits that it would not be equivalent security if it only had a Lien Bond to rely on. He states that if he had to go to Court to collect the amounts claimed, and his client obtained a judgment, they could act on that judgment immediately if the money had been paid into court or if they still had the lien upon the lands. On the other hand, if an insurance company provided a bond (as is proposed here) the lien holder is at risk of the insurance company running into financial difficulty, the insurance company having no assets in the province, or the insurance company disputing his claim, as was the case in Northern Air Construction Ltd. Further, he points out that in the affidavit filed on behalf of the applicant in which

9 7 the applicant identifies the insurance company it intends to have provide the bond, the deponent states that the insurance company is prepared to issue a Lien Bond, if requested, subject to a number of conditions. The respondent states that these unknown conditions are unacceptable and can only serve to place it in a less favourable position than it is at present. [23] The applicant filed an affidavit showing the financial rating of its proposed insurance company to be excellent and indicating that the company is approved by the Government of Canada as an acceptable bonding company and further that the company is licensed to do business on Prince Edward Island. [24] In Grand Pacific Holdings Ltd. v. Progressive Sheet Metals Ltd. (1983), 15 C.P.C. (3d), 398 (B.C.S.C.), the applicant petitioned the Court to allow it to file a Lien Bond to replace a mechanics lien in a situation reasonably similar to the one before the Court. In that case, however, there was no information on the state of the proposed financial institution. Master Brandreth-Gibbs rejected the request of the petitioner for a bond to be allowed and instead ordered that a letter of credit be posted as security, relying on the basic principle that the lienholder, who held in rem security, should not be placed in a less favorable position by releasing its charge against the title to the land. The Master considered the facts on the application, including the lack of information on the proposed bonding company, and weigh[ed] the matter in favor of the security of the lienholder, rather than in favor of the convenience of the party wishing to remove the lien and replace it. [25] There are many situations in the construction industry where liens are filed. Often, the filing of a Lien Bond is not opposed by the lien claimant. Indeed, many lien claimants may consider themselves to be better off with a Lien Bond in place, thereby eliminating any potential need for them to proceed to sale of what might be an unfinished project in order to enforce their lien. Other liens are vacated by the payment into Court of the amount claimed, the filing of a letter of credit, or even by substituting other lands as security in place of the security granted by the lien. It is my opinion that in any instance in which the lien claimant opposes the discharge of a lien based on their dissatisfaction with the proposed substituted security, the onus is on the person seeking to vacate the lien to satisfy the Court that the replacement security does not diminish the security the lien claimant received by virtue of the statute through which the lien arose. [26] While we have been provided with some information on the proposed bonding company, counsel for the respondent both challenges the quality of the information and raises concerns about the change in the respondent s enforcement position if a Lien Bond from this company was accepted as substitute security. The information was presented to the Court by way of an affidavit sworn by an associate of the law firm

10 8 representing the applicant and was stated to be based upon his personal knowledge of the facts deposed. The deponent then states he was advised by a manager of the proposed bonding company (and does verily believe) that the company would provide a bond subject to a number of conditions. The deponent then refers to a company he identifies as an independent corporate rating service and he provides their published ratings of the proposed bonding company and its parent company. After questioning the extent of personal knowledge the deponent really has with regard to the issues of significance in the affidavit, the respondent points out that it is being asked to accept a bond from a company when there is no indication of what conditions would be imposed, no indication that the proposed bonding company has assets in the jurisdiction, no information on either the company conducting the corporate rating service or the basis upon which they drew their conclusions, and further that the corporate rating service specifically states that their opinions are not a warranty, nor are they a recommendation of a specific policy form, contract, rate or claim practice. The respondent claims that these issues constitute additional risk to its security position that the applicant is trying to download to the respondent. Similar circumstances were considered in B.C. Ltd. v. Tham Demolition Ltd. (1994), 18 C.L.R. (2d) 161 (B.C.S.C.) where Master Tokarek commented favorably upon the decision in the Grand Pacific Holdings Ltd. case. [27] In my view the respondent s submissions made with respect to the increased risk and the potential for increased difficulties in enforcing its security have merit. At present, the respondent has a charge against the owner s interest in the land. This is a substantial lien, being in the sum of $2,225,993. I am not prepared to jeopardize the respondent s statutorily granted security by ordering it to be exchanged for security with unspecified conditions, and which may require more onerous enforcement procedures. The statutory regime sets up a hold back fund which, as is stated in Anger and Honsberger, is to be retained inviolate by the owner and which could be paid into Court to discharge the lien. Enforcement against those funds is the primary alternative contemplated by the Act to the retention of the in rem security of the lien. [28] The applicant has not discharged what I perceive to be its onus of demonstrating that the respondent will not be in a less favorable position if the replacement security was accepted. I decline to exercise my discretion under section 53 to allow a Lien Bond to be filed in exchange for vacating the lien. Counter-Application: [29] The respondent (WCI) filed a counter-application for an order requiring the owner (IWMC) either to pay the amount of the Claim of Lien into Court, or to post a letter of credit as security.

11 [30] I agree with the applicant (ADI) that the Court has no jurisdiction to make the requested order. The Act provides for a lien claimant to commence an action to enforce its lien. There are no provisions for the lien claimant to force the owner to vacate the lien by providing any particular type of replacement security. I therefore dismiss the respondent s counter-application. 9 [31] I did note that in the MOU signed by the applicant and respondent there is provision at paragraph 2.3 for the respondent (WCI) to provide operating contract security to the applicant (ADI) until certain events occur. It is interesting to note that the security required by ADI in this instance is that of an irrevocable letter of credit. As is indicated at paragraph 21 of this judgment, WCI has offered to accept a letter of credit as satisfactory substitute security to vacate the lien. While I have dismissed the respondent s counter-application to force the applicant to provide a letter of credit, there is of course nothing prohibiting the parties from agreeing to such an arrangement. Amount of Security: [32] As this decision neither allows for nor requires the provision of substituted security, it is unnecessary for me to address the parties dispute with respect to the proper amount of any such security. As a general comment, if substituted security had been granted, I am of the view that I would have had the authority under section 53(2) of the Act to accept security for an amount less than the face amount of the lien. For example, the respondent acknowledged that it could not claim a lien for any amount of interest. Considering that and other adjustments, the respondent proposed reducing its lien claim to $2,034,933. Notwithstanding that s. 53(1) allows for substituted security of the amount claimed in a registered claim of lien..., it would be absurd not to allow the claimant to reduce its claim. Costs: [33] While there was both an application and a counter-application dealt with on this matter, by far the more significant matter was the application by ADI for the provision of a Lien Bond as substitute security. The applicant was unsuccessful and the respondent shall have its costs on a party and party basis. Campbell J. December 31, 2002