C & E GROUP LTD. Plaintiff / DEFENDANT BY COUNTERCLAIM And: JENCO LIMITED First Defendant / PLAINTIFF BY COUNTERCLAIM And: NEWFOUNDLAND v. LABRADOR ENGLISH SCHOOL DISTRICT, 2021 NLSC 37

court crest IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR GENERAL DIVISION Citation : C & E Group Ltd. v. Jenco Limited , 2021 NLSC 37 Date : March 17, 2021 Docket : 201801G1248 Between: C & E GROUP LTD. Plaintiff / DEFENDANT BY COUNTERCLAIM And: JENCO LIMITED First Defendant / PLAINTIFF BY COUNTERCLAIM And: NEWFOUNDLAND AND LABRADOR ENGLISH SCHOOL DISTRICT Second Defendant Before: Justice Deborah J. Paquette Place of Hearing: St. John’s, Newfoundland and Labrador Date of Hearing: December 14, 2020 Appearances: R. Paul Burgess, Q.C. Appearing on behalf of the Plaintiff / Defendant by Counterclaim

Danielle S. Somerton Appearing on behalf of the First Defendant / Plaintiff by Counterclaim Ian C. Wallace Appearing on behalf of the Second Defendant Authorities Cited: CASES CONSIDERED: Brook Construction

(2007) Inc. v. Blackwood Contractors Ltd. , 2015 NLCA 18 ; Terra Services Inc. v. Her Majesty the Queen , 2018 NLSC 221 STATUTES CONSIDERED: Mechanics’ Lien Act , R.S.N.L. 1990, c. M-3 ; Proceedings Against the Crown Act , R.S.N.L. 1990, c. P- 26 ;

Interpretation Act , R.S.N.L. 1990, c. I-19 RULES CONSIDERED: Rules of the Supreme Court, 1986 , S.N.L. 1986, c. 42, Sch. D TEXTS CONSIDERED: Newfoundland Law Reform Commission, Report on the Mechanics’ Lien Act: Certain Substantive Issues , NLRC - R3 (St. John’s, Nfld.: The Commission, 1990) REASONS FOR JUDGMENT Paquette J. : INTRODUCTION [ 1 ] In 2016 the Government of Newfoundland and Labrador (“Crown”) contracted with Jenco Limited (“Jenco”) to perform electrical safety upgrades at J.R. Smallwood Middle School for the agreed price of $2,544,950.

Jenco, in turn, subcontracted some of the work to C & E Group Ltd. (“C & E”). [ 2 ] A dispute arose between Jenco and C & E respecting payment of $187,660.35 for work and supplies. The subcontractor registered a lien claim pursuant to the Mechanics’ Lien Act , R.S.N.L. 1990, c. M-3 , (“ MLA ”) on 4 January 2018. The Newfoundland and Labrador English School District (“School District”) was identified as the owner of the lands subject to the statutory lien under subsection 6(1) of the MLA .

The Claim for Lien stated that C & E had “provided at the request of Jenco Limited labour and materials for inter alia related to buildings automation and mechanical works to the aforementioned property pursuant to a contract referred to as DOE Project No. 100381026”. [ 3 ] The ensuing statement of claim sought enforcement of the statutory lien in the event that Jenco defaulted in the payment of its claim. This statutory remedy is unavailable under the law of contract.

Jenco has counterclaimed alleging that it incurred expenses due to C & E’s failure to fulfill its contractual obligations. [ 4 ] The MLA also provides claimants with access to holdback funds up to 10% of the contract price ( subsection 12(1) ), in the hands of the entity primarily liable upon a contract. In this case holdback funds would be the responsibility of the Crown, if the MLA applied to it.

C & E has not pursued this remedy in its statement of claim. [ 5 ] On 26 June 2018 Jenco obtained Court approval to post security in the amount of $197,660.35 in order to remove the lien from the school property, as authorized by subsection 26(2) (

a) of the MLA . [ 6 ] On 4 December 2019 C & E applied to add the Crown as a defendant on the grounds that it then understood that the Crown, and not the School District, was in fact the freehold owner of the school property. C & E subsequently withdrew this application. A title search report filed in these proceedings confirmed that the School District was the registered owner. There would also appear to have been some confusion by Jenco as to who it contracted with for the school project.

Its statement of defence recites that the contract for the school work was with the School District, not the Crown. [ 7 ] The School District’s statement of defence confirmed that it had made a request to the Crown for the work in question. [ 8 ] The governing contract between the Crown and Jenco was also placed on the record. There is no privity of contract between the School District and either of the parties and its lands no longer stand imperiled by potential sale in default of Jenco’s payment of any court-ordered damages.

Its role in the proceedings is necessary nonetheless because a valid charge on lands underpins these proceedings and distinguishes them from a case in breach of contract. Indeed such is the importance of the lien upon the lands where works and services take place that the remedy available to the holdback funds is legally “parasitic” upon the charge on the lands ( Brook Construction

(2007) Inc. v. Blackwood Contractors Ltd. , 2015 NLCA 18 , at para. 20 ). Green C.J.N.L writes “there cannot be a charge

on the holdback funds under the Mechanics’ Lien Act where there is no lien available on the land of the owner ...” (at paragraph 45). [9] On 13 October 2020, the School District commenced this interlocutory application to have the statement of claim dismissed asagainst it and the mechanics’ lien claim struck, as failing to comply with the MLA because the Crown, as a party to the main contract,was (

i) not named in the Claim for Lien contrary to subsection 17(1), or (ii) sued as a defendant pursuant to subsection 24(1). Subsections 17(1) and 24(1) of the MLA provide: 17.

(1) A claim for a lien may be registered in the registry and shall set out (

a) the name and address for service of the person claiming the lien and of the owner or of the person whom the person claimingthe lien, or his or her agent, believes to be the owner of the land, and of the person for whom the work was or is to be done, or thematerials were or are to be placed or provided, and the time within which the work was or was to be done or the materials were to beplaced or provided; (

b) a short description of the work done or to be done, or the materials placed or provided or to be placed or provided; (

c) the sum claimed as due or to become due; and (

d) a description of the land. … 24.

(1) A lien for which a claim is registered stops existing on the expiration of 90 days after the work has been completed or thematerials have been placed or provided, unless in the meantime an action is started to realize the claim or in which an existing claim maybe realized, and a certificate is registered as provided by

section 23. [10] Jenco did not file a response or legal brief in this interlocutory application and participated only to the extent of stating that itsupported the position of the School District. [11] C & E counters that it has named the School District as land owner in order to avail of the mechanics’ lien remedy under theMLA. ANALYSIS [12] Subsections 26(2)(

b) and (

c) authorize the Court to vacate a lien and dismiss an action on “appropriate” grounds. Thediscretion to invalidate a lien prior to trial, however, is to be exercised only in the “clearest of cases.” Knickle J. in Terra Services Inc. v.Her Majesty the Queen, 2018 NLSC 221, reviews the law at paragraphs 21 and 22: 21 The combination of Section 26(4) and Section 26(2)(b), supports that if the lien was invalid at the outset, that invalidity would bean “appropriate ground” to release Pomerleau from its obligation to maintain the Bond.

However, as submitted by Terra Services, theCourt’s discretion to vacate a lien for invalidity on an interlocutory application, should not be lightly exercised. This was expressly statedby Orsborn, J in Fairview Investments Ltd. v. J.D. Irving Ltd. (1999), (NL SC), 566 A.P.R. 175, 49 C.L.R. (2d) 58(Nfld. T.D.)), at para 13: Thus, on a

summary application such as this, while the court is given the jurisdiction by the Act to vacate a claim of lien prior totrial, the consideration required starts from the position that the statute contemplates resolution of lien claim issues at trial, thatinterlocutory proceedings (at least in the enforcement action) are discouraged, and that a claim of lien should be vacated before trial onlyin the clearest of cases. 22 This has also been the approach in other jurisdictions with respect to such applications. For example, in W.M. Fares & AssociatesInc. v. 3035605 Nova Scotia Ltd., 2006 NSCA 120 (N.S.

C.A.), the Nova Scotia Court of Appeal, described the approach this way, atpara 10: And so it is plain to see that the party seeking to vacate a lien faces a significant evidentiary hurdle. There is a “heavy burden” onthe applicant to demonstrate that the remedy is “clearly” deserved. Those who seek the effective and immediate protection which a lienaffords, must not be deprived of that important security “except on the clearest” of grounds. Those prerequisites - as Judge O Hearnexplained - must inform a judge’s determination as to whether or not the claim can be “safely ... disposed of on a

summary application.”

... [ 13 ] Here, both parties relied on the same caselaw in support of their respective positions, Brook Construction and Terra Services . [ 14 ] In Brook Construction , the court of appeal settled the then novel question as to whether the MLA applied to the Crown, concluding that the Crown immunity rule prevailed against the statute’s application. [ 15 ] Brook Construction addressed the statutory remedies and corresponding defendants in a mechanics’ lien action at paragraph 26: 26 Following the registration of a lien claim, the claimant is required to commence an action, within a limited time, "to realize the claim": Act , subsection 24(1).

One cannot make a claim to "realize" a claim unless it is made against the person from whom relief can be obtained. Thus, if a lien is claimed against land, the claim must include the owner of the land as a party.

If the claim is against a fund of money, the claim must include as a defendant the person in whose hands the money is being held. [Emphasis added.] [ 16 ] Green C.J.N.L., writing for the majority at paragraph 27, explained the legal framework of the holdback remedy: 27 The ownership of the money is not the determining factor; it is the person who is in custody of or has control over the money, i.e. the person who is obligated to retain the holdback, that is key.

Thus, Blackwood's argument that because Brook is due the contract money, including the 10% held back, the holdback is owned by Brook and not the Crown and that it is therefore sufficient to sue Brook, cannot succeed.

The Crown is the body who, if the Act applies , is statutorily required to "retain" the holdback funds, and it is the Crown, as the body who has possession and control over the money by virtue of holding it back, that would have to be made subject to an order to release the money to Blackwood and not to Brook pursuant to the contract.… [Emphasis added.] [ 17 ] Welsh J.A., at paragraph 92 in her dissenting reasons also addresses the holdback fund in the context of a construction pyramid.

The “person primarily liable” is not limited to the main project contractor but includes either an “owner, contractor, or subcontractor” under each contract: 92 The holdback fund is intended to assist in that purpose by ensuring that funds will be available to at least partially satisfy liens that may arise.

In Bristow, Glaholt, Reynolds & Wise, Construction Builders’ and Mechanics’ Liens in Canada , 7th edition (Toronto, ON: Carswell, 2009), the rationale underlying the retention of holdback funds is discussed, at pages 4-3 to 4-4: Construction projects tend to be pyramidal in structure, with an owner at the apex and contractors, subcontractors, and those claiming under them in descending degree of privity of contract forming the base of the pyramid. ...

Using the Newfoundland and Labrador Mechanics’ Lien Act as an example, section 12(1) provides that “the person primarily liable” under any type of contract under which liens may arise must, as the work progresses, retain for a period of 30 days after the completion or abandonment of such work, 10 per cent of the value of the work, service, or materials actually done, placed, or furnished.

Therefore, the holdback must be retained by the person primarily liable on each contract, whether that person is an owner, contractor, or subcontractor, for the benefit of those below that person on the pyramid. [ 18 ] Here, by virtue of

Article 4 of the contract with Jenco, the Crown agreed to holdback payments under the contract “in accordance with industry practice” where “legislation does not exist or apply”. This is different than a statutory holdback under the MLA which is imposed irrespective of contract terms. The rules governing the Crown’s exercise of the holdback provision is as contractually stipulated. The law is clear that C & E cannot enforce the statutory holdback remedy against Jenco or the School District.

C & E, however, is not pursuing this remedy. [ 19 ] The subcontractor in Brook Construction on the other hand, sued for both the holdback remedy and the charge on the lands as against the contractor. This was fatal to its claim as the Crown was both the land owner and the entity who, if the MLA applied, was responsible for retaining holdback funds. The subcontractor conceded that it had no claim to Crown lands as a result of the Crown immunity rule but argued that the holdback funds could be enforced against the contractor and did not require the addition of the Crown as a defendant.

Green C.J.N.L. explained why it was not possible to enforce the holdback claim against the contractor at paragraphs 28 to 30: 28 In its claim for lien, Blackwood claimed a lien against the benefitted land, which it claimed was Crown land. It also claimed a charge against the holdback funds. The holdback funds were monies held back by the Crown pursuant to the main contract with Brook. If they were not held back by the Crown and were instead paid to the payee (Brook) under the contract, they would no longer be holdback funds.

Any money held back by Brook in relation to its contract with Blackwood for the benefit of subcontractors, workers or material men of Blackwood would be irrelevant to Blackwood as its claim is in contract against Brook (with whom it is in privity) directly for the total amount claimed, not just the holdback amount, as due and owing under the subcontract. On the other hand, even if the Crown is wrongfully retaining the money as holdback, the Crown in such circumstances is the party who must be subjected to an order for payment.

29 Thus, even though Blackwood subsequently conceded that it has no lien claim against the land, it must continue to assert, as it does, that it has a claim to holdback money in the hands of the Crown. Either way, it must seek relief from the Crown. Accordingly, even on Blackwood’s theory of the case, it must sue the Crown in order to maintain its claim. 30 Failure to do so, in my view, is fatal to Blackwood’s claim as a statement of claim asserting a claim or cause of action under the Mechanics’ Lien Act against persons from whom the statutory remedies conferred by the Act are being sought.

Of course, Blackwood may continue to proceed with its claim for breach of contract against Brook, as that is not dependent on the Act. See

section 38 of the Act. [Emphasis is original.] [ 20 ] Notwithstanding that the remedies could only be pursued against the Crown, the court of appeal concluded the Crown was not bound by the MLA . In reaching this decision, consideration was given to the Crown immunity rule, the Proceedings Against the Crown Act [1] , the

Interpretation Act [2] , the Newfoundland and Labrador Law Reform Commission, Report on the Mechanics’ Lien Act: Certain Substantive Issues [3] , and the legislation of other jurisdictions. The court of appeal also received submissions from the Crown as intervenor. As a result, the subcontractor’s action against the contractor could only proceed as a breach of contract case without the benefit of the statutory remedies. [ 21 ] Terra Services was a contract for the construction of a school. On similar facts as here, the Crown was the main contracting party and the School District, the land owner.

There was some question, however, as to whether the lands were subject to the Crown immunity rule, an evidentiary issue which could only be decided at trial. The subcontractor in Terra Services failed to add the School District as defendant. [ 22 ] Knickle J. concluded that enforcement of the statutory charge upon the lands required that the land owner be sued, at paragraph 31: 31 Terra Services has never commenced proceedings against the School District in the enforcement of its claim.

If the School District was the owner who was to be the subject of the lien claim, and not the Crown, as Terra Services now asserts, it was incumbent upon Terra Services to commence proceedings against, or otherwise include the School District as a party in the proceedings. [Emphasis added.] [ 23 ] Notwithstanding that the issue as to whether the Crown immunity rule applied to the School District’s lands was not resolved, Knickle J., applying Brook Construction, nonetheless dismissed the action, satisfied that it was a clear case to do so.

This was because even if the Crown immunity rule applied and the Crown was the owner of the lands, the Court could not find that the Crown had voluntarily submitted to the MLA (at paragraph 53).

The failure to name the School District in the Claim for Lien and subsequent legal proceedings was not a procedural defect but a “substantive failure” to comply with the limitation period set out in the MLA (at paragraphs 39 to 41). [ 24 ] In consideration of the facts and the law advanced in these proceedings, I conclude that the School District has failed to establish that this is the “clearest of cases” to declare the claim to lien invalid in this interlocutory application. [ 25 ] The Claim for Lien identified that “labour and materials” were provided at the request of Jenco “pursuant to a contract referred to as DOE Project No. 100381026”.

I am satisfied that while the reference to “DOE Project” did not explicitly state the parties to the main contract, there was no prejudice to “the owner, contractor or subcontractor, mortgagee or other person” within the meaning of subsection 19(1) of the MLA which states: 19.

(1) Substantial compliance with sections 17, 18 and 30 is sufficient, and a claim for lien is not invalidated because of failure to comply with the requirements of those sections unless, in the opinion of the judge, the owner, contractor or subcontractor, mortgagee or other person is prejudiced by that claim, and then only to the extent to which he or she is prejudiced. [ 26 ] Not only was there no evidence to establish prejudice, the School District itself submitted that “DOE” was known in the construction industry to mean that the project was pursuant to a government contract. [ 27 ] The School District’s argument that C & E failed to commence its action against the proper parties pursuant to the mandatory timeframe set out in subsection 24(1) of the MLA also fails.

C & E commenced proceedings against the School District to “realize” the claim to a lien on its lands within the statutory timeframe. [ 28 ] The School District has not alleged that the Crown immunity rule is applicable to the lands. This would have been problematic for C & E because the law is settled that the MLA does not bind the Crown. The party against whom the mechanics’ lien remedy is sought stands before the Court.

I am mindful that it is the stated object of the MLA to provide a forum in which litigants seeking to enforce mechanics’ liens may do so “at the least expense” in a procedural framework “as far as possible of a

summary character” ( subsection 43(1) ).

[ 29 ] For the foregoing reasons the application is dismissed. COSTS [ 30 ] Costs in this interlocutory application shall be in the cause pursuant to Rule 55 of the Rules of the Supreme Court, 1986 , S.N.L. 1986, c. 42, Sch. D . _____________________________ Deborah J. Paquette Justice